Categories Fintech

Cracking the Crux of the Mortgage Market

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Mortgage banking is a huge market, but it’s been a notoriously bad market for startups. Late-funnel-high-intent keywords for real estate are among the most lucrative and efficient in online ads. So the only real way to build a great business is to find a more cost effective way to scale acquisition. One approach is to go earlier in the funnel, where there may be more inefficiency in indirect intent, and try to build products that solve problems earlier in the home buying process.

Mortgage banking is a huge market

The mortgage industry saw $2.1T in fundings and $65B in revenue. The banks, led by Wells Fargo, have been shedding market share to non-bank lenders over the last decade, falling to 47%, while Digital lenders, led by Quicken Loans and LoanDepot, have accelerated their growth and represent nearly 10% of the market.

Mortgage is a startup graveyard

VCs have made major investments in mortgage startups during the last decade, notably Clara Lending, Sendio and Better Mortgage.  All unveiled in 2016 and spent heavily to develop their own internal point of sale and processing systems. Customer acquisition followed a traditional path with most buying leads and competing at the bottom of the funnel with established players like Quicken and LoanDepot.  The lack of differentiated point of acquisition or product differentiation meant their CAC was not necessarily any better than the legacy players, and they have been capital intensive businesses to scale.

As groups like LendingTree, Bankrate, Nerdwallet and Zillow have dominated the paid mortgage lead space, new entrants must differentiate on both point of acquisition and product to compete.

CAC is efficient in the mortgage lending market. Insurance and real estate are the two largest ad categories on google, and late funnel high intent keywords are priced efficiently. ‘Mortgage’ ($47.12) and ‘Loans’ ($44.28) are literally #2 and #3 of the top 20 most expensive google adwords — only ‘insurance’ ($54.91) is higher.

By drilling down from general real estate CAC, to zillow mortgage leads, to early stage shopping intent, we can see how large an economic advantage in acquisition will accrue to anyone who can deliver a differentiated home shopping experience against upstream home shopping intent, and thereby acquire users there rather than on ‘mortgage’ and ‘loan.’

Real estate average CAC: $116.61

Zillow mortgage lead: $90

iLeads home shopping intent*: $1.00

*fully complete form for a beginning home shopper with credit and contact info

By going to the top of the funnel, we can  acquire leads at nearly 1% the cost of Zillow Mortgage Leads, then cultivate them through a differentiated free shopping experience as the bridge between that lead and the financial products we monetize on. The distinction here is that most mortgage lenders just see the loan as their product, and do not think about digital products for upstream utility — but digital products are the bridges between the upstream shopper needs and downstream borrower leads.

So we effectively buy a $1 shopper lead and inexpensively enrich into a $90 borrower lead through a superior shopping product. So although we can do this cheaply at scale, it takes a special team; the engineering and product work is difficult, the volume of data and machine learning in the cloud is significant, and you need both tech and finance teams under one roof.

Finding the best house for me

The only way to build something that can scale without massive capital intensity to acquire clients is to devise a new acquisition strategy backed by a product that improves the upstream home shopping experience — something upstream from Zillow.

Today this space is occupied by a morass of clunky web mortgage calculators and tedious manual google queries for things like best school districts within some radius of where you work. After this manual research supported by primitive tools, the shopper is stuck relying on naive filtering to sift through thousands of listings.  At this point, the shopper often doesn’t even understand what they can afford or what their financing options are. Most give up and restart the process with a Realtor, which limits their ability to get to a well-defined notion of affordability, and limits their geographic coverage because Realtors limit their specific areas of operation.

SimpleFinance has a better way to ensure millennial homebuyers find the neighborhood and home of their dreams, and we think we can half the rate of the current 63% of Millennial homebuyers expressing remorse about the decision they’ve made regardless of whether they work with a Realtor.

By acquiring the customer at the early stage of shopping, we can replace several antiquated tools like mortgage calculators and manual search queries with a new purely digital product that replaces the legacy planning tools and accelerates the search process. It’s also advantageous to the shopper because they understand affordability aspects of their situation that others might not all the way until the end of the process when they sit down with a mortgage banker. We can quickly gather the core financial attributes and most important features to the shopper on a single screen, and immediately drop them into a map of ‘neighborhoods’ that are most suitable for their needs and best given their buying power. We can immediately help them understand their buying power under different financing scenarios; min down payment, max downpayment, and with an equity booster from players like Unison and Point.