Buying a home, for most Americans is the largest single financial investment they will make in their lives. Which would leave one to believe, it is an industry built on hand holding, customer-centricity and good ol’ jingles on your TV telling you that it’s all going to be A-okay.
The reality is however, the mortgage industry has taken a rather different approach to the whole business model. Instead, they have partnered with realtors and other distribution channels that have made the customers the ideal simpleton at the bottom of the food chain. Instead of customer-centricity, this is a business where forcing customers hands and twisting arms has proven to be a tried-and-true method not worth messing with.
That is where Vishal Garg, Co-Founder & CEO of Better come in. Finally, a team of innovators, customer-centric folks and visionaries are setting out to say there is a “Better” way. A way that doesn’t harm but rather helps the customer. Through aligned incentives and innovative technology to reduce the burden and cost of the typical paper trail associated with the mortgage process, Better is reimagining what the mortgage experience should be like.
Though challenging to do, Vishal and his team are winning by going back to the basics. By that I mean doing right by the customer. Check out how he and the team are accomplishing this below.
CL: Vishal, since college back in the 90’s you have been active both in investing and building financial businesses. Why the passion for Fintech and why build Better now?
VG: In 2012 I was in the process of buying a house with my wife, who at the time was pregnant with our second child. It was a nightmare experience – aggressive calls from shady brokers, endless paperwork, and weeks of radio silence from our lender while the seller got increasingly impatient.
In the end we lost the house to an all-cash buyer. After that experience, I did some digging and learned how outdated and inefficient the mortgage industry was. I realized that if getting a mortgage was hard for people like my wife and I – young professionals with access to capital – it must be near impossible for others.
With Better, we set out to make homeownership accessible for more people by creating a mortgage experience that was inclusive and customer-focused. I knew that we could leverage technology to not only digitize and streamline the process but to fundamentally re-engineer how mortgages are made and in doing so democratize access to homeownership.
CL: For those that don't know can you define Better as a business?
VG: Better is a direct lender, which means we originate and fund mortgage loans and make money by financing those loans with investors. Unlike traditional lenders, we don’t charge origination fees or processing fees. Instead we’ve developed a matching algorithm that finds our customers the best possible pricing and product from our investor base, which includes 21 large institutional investors that comprise over $700 billion of annual mortgage financing demand, including GSE’s like Fannie Mae.
This provides a consumer a unique value proposition versus going with any particular bank or lender as we are able to provide both better prices and a higher likelihood of approval.
As a company, we first focused on getting refinance loans right. We’ve now expanded to home purchase, focusing on education and meeting our borrowers early in the process with a 3-minute online pre-approval.
CL: In order to provide the best consumer experience you have actually become a direct lender yourself through acquisition. What have been some of the challenges in integrating with an outside lender and building your core business functionality around an established organization?
VG: The biggest challenge was the cultural shift. We were committed to support and education over sales – which meant eliminating commissions and instead hiring loan officers who shared our mission to empower consumers. This meant that we had to part company with many of the old school commissioned salespeople the prior bank had who were unwilling to change to a customer centric model.
We also decided to move to a team coverage model to provide the best possible support throughout the process, so that we would be available whenever customers needed us to be – nights and weekends included. The fun part was the technology aspect. We got to go under the hood, take things apart, and figure out how we were going to re-engineer every aspect of the mortgage process.
CL: From a customer acquisition standpoint what are some of the marketing channels you pursue, and how are you managing to keep customer acquisition cost within reason?
VG: We started in the refinance space, so at first we were focused on finding customers where they were already doing their research – comparison shopping sites. The problem with those channels is that they were filled with boilerroom mortgage brokers who frequently bait and switch consumers and harass them with multiple cold calls – I think on average over 50+. We found our niche on those sites by advertising mostly on nights and weekends – when traditional mortgage brokers were sleeping and interestingly, our target customers were searching for a better rate.
The goal was to meet them where they were and help pull them into our ecosystem. Since launching the home purchase side of our business, our goal is to meet customers early in the process. That has meant a bigger emphasis on channels like Facebook, and focusing on providing education and personalized guidance through content and calls with our Loan Consultants.
CL: In terms of core consumers that you target, are you after first time homebuyers, established buyers, those buying more expensive homes? What represents the best consumer opportunity for Better?
VG: The best opportunities for us are different across purchase and refinance. On both sides they need to be customers who are comfortable transacting online, and who see the value that technology brings to the process in terms of speed and transparency.
There are typically young professionals who are still struggling with student loan debt. They’re people living in cities with both risings rents and increasingly competitive housing markets.
We are bringing affordable loan options online – like CRA and Fannie Mae’s HomeReady – and helping creditworthy borrowers save money and start building equity through homeownership.
CL: Do you see any aversion from prospective customers around using an online mortgage lender, rather than having an in-person experience?
VG: More and more, people expect to be able to do everything online and on their own time. Our team is available seven days a week to answer questions and provide support. Just because we’re online doesn’t mean we don’t have exceptional staff who can troubleshoot with customers and help explain what is often a nebulous, opaque process. That’s the fallacy of that argument – that if you’re online, there’s no personal support.
Its actually the reverse, because we are online we can afford to provide amazing personal support. It goes back to our decision to eliminate commissions – we are committed to providing education and transparency whenever our customers interact with us.
The bigger challenge is actually real estate agents. They often have relationships with local lenders, who often have higher rates and worse service but offer incentivesto agents. . So now, we’re focusing on educating agents on how we can help them and their customers. The switching costs are high, but we’ve seen a lot of success with like-minded agents.
CL: Do you look at Better like the Zappos of Mortgages? As you likely know Tony Hsieh, the CEO of Zappos doesn’t even care about shoes, he just cares about providing the best customer service organization in the industry? In a sense you are a service organization for an industry greatly lacking a provider like yourself.
VG: Absolutely, we are a service organization first. We started with the complicated part, which was removing friction in the transaction process and ensuring we could deliver the most competitive pricing possible. Over the past year, we’ve put measures in place to support customers with people and content. Particularly with first-time homebuyers, it’s important that we win in service, because just saying our process is easier doesn’t resonate if you’ve never been through it before – people have no idea how painful it could be.
CL: What are some of the challenges in providing 24/7 support in an industry where that is unheard of while still progressing towards profitability, and how do you measure your customer reps performance if not on sales?
VG: Our goal is happy customers, and we track our NPS score closely. We’re being thoughtful, automating the parts that don’t require empathy, and shifting those resources to the functions that do. By lowering the cost of origination, which for a traditional lender is almost $8000 a loan and which for us is almost 1/5 th of that amount, we can afford to make that investment.
This is amplified through word of mouth. Most people pick a lender based on a recommendation from their agent, friend, or family. The more people who have a good experience with Better, the more potential business we can get. We also use our customer service team for R&D. We can figure out what types of questions are most common, and how we can build those answers into our content or the product experience to help more people at scale.
CL: I’d imagine in addition to providing a top tier consumer experience and quicker times to close, customers are also looking for great rates. How does Better typically compare to more traditional offerings?
VG: We believe that offering the lowest rates is table stakes.
On conforming loans, we are at least 25 bps per year lower than the big banks, and often as much as 1% per year cheaper than the big call center players like quicken or loan depot. Our Better Price Guarantee is a reflection of our confidence in our platform and our rates. We promise to beat a competitor’s price by $1000, or we will pay the customer $1,000 to fund with the more competitive price.
CL: Can you talk a bit about the growth of Better over the past few years and where you see the online mortgage industry moving towards in the near future?
VG: Since the launch of Better.com in January 2016, we’ve originated over 2000 loans worth $730 million. Today, we are available in 13 states and plan on expanding rapidly to all 50 states, with the goal of increasing access to homeownership for as many people as possible. We’re happy to see other companies trying to innovate in this space.
Many of our competitors are building tools to improve the application process. We see ourselves as taking innovation one step further, by creating efficiency on the origination side and building out a matching engine that connects potential homeowners with the most affordable mortgage products possible from institutional investors. For us, the future means continuing to level the playing field and making homeownership accessible for as many people as possible.
CL: Is there a point where you believe companies like Better will surpass traditional mortgage providers as the dominant originator of mortgages in the US?
VG: More than just old technology, traditional mortgage providers are entrenched in old paradigms. Unless the industry fundamentally re-aligns itself to put consumers first and disavow the bottom-line approaches that got us into the housing crisis, it’s only a matter of time before the new way of doing things wins out.
CL: Would Better ever consider offering up its loans to secondary Fintech partners such as PeerStreet or Income& that provide these loan offerings to individual investors?
VG: Our goal is to have a wide variety of investors and types of investors so that the most consumers can get the best possible products and rates. We're constantly finding new partners to work with to create innovative financial products or pass along better pricing to the consumer. In short, we’re open to these opportunities provide it helps our customer access a broader product offering or increases affordability.
CL: Better is quickly spreading across the state's. But what are some of the challenges presented by the current legal infrastructure of home buying that could be improved to enable better scale and efficiency?
VG: I don’t think that the legal infrastructure is necessarily the challenge. Rather, it’s misaligned incentive structures and inefficiencies in access to credit. For example, there are many programs designed to help get people into homes, but traditional lenders are unaware or uninterested in surfacing them to borrowers.
We’ve had cases where we knew a customer qualified for an affordable lending product like CRA or HomeReady, but when they went to comparison shop, they were (wrongly) told by other lenders that they weren’t eligible. Then there’s the fact that today’s underwriting rules were written at a time when stable w2 employment was the norm, and student loan debt wasn’t as crippling an issue as it is today.
Tackling these issues requires a few key changes(1) We need to first, make sure creditworthy borrowers are properly assessed, and that future income can be predicted for the modern worker. Second, we need to be able to surface opportunities for affordable lending products in real time. And lastly, we need to continue to align incentives so that borrowers are always getting the best product for them, rather than the best commission product for the agent.
CL: Lastly, you also founded One Zero Capital many years ago and continue to invest in incredible Fintech focused companies. From this experience what are some of the other areas of Fintech that really get you excited?
VG: The businesses that excite me are those that are collecting and harvesting unstructured data, disparate datasets or generating unique user generated data, adding context to it and combining them with other sets of data through some multi-channel workflow and in that process, delivering a unique value proposotion or end product to consumers which empowers them to make better choices. Those businesses are the ones that have the highest likelihood of success in an increasingly commoditized digital economy.
The Minute Rundown with Vishal Garg
CL: If you could provide one to someone considering starting up who would it be and why?
VG: Find a way to get the horse inside troy. Find a regulated, rich and really old business which performs a basic human need and find a way to get yourself in it in the cheapest fastest way possible. To confirm this, go to an industry conference, if it’s filled with old fat guys in expensive suits trailed by young people who look like they came out of a brooks brothers catalogue and the post conference parties are in really expensive restaurants, you are in the right place. If the post conference party is on a boat, you hit pay dirt.
CL: Vishal, in your past you founded another company called MyRichUncle which didn't succeed, can you talk a bit about that experience and how that has shaped you as a leader?
VG: MyRichUncle was both an amazing and a humbling experience for me. I started the company when I was 21 and took it public on NASDAQ when I was 26. Along the way, we revolutionized the student loan market taking it from a 3 week application process at the financial aid office fraught with friction to a 7 minute process online with money in your account the next day.
We gave over 25,000 college students who didn't have a cosigner a private student loan based almost entirely on their future income potential, something lenders still don't do today. And we grew from zero to being one of the top 5 student lenders in the country in a space of 4 years.
But ultimately we failed because we were over reliant on our financing partners, Merrill Lynch and Lehman Brothers, who both turned out to be far weaker than anyone imagined, and our investors lacked the conviction to continue to fund the business as it became more capital intensive through the financial crisis. We lacked the experience to slow our growth and optimize and build around our weaknesses (reliance on securitization) when things were going gangbusters (2005-2007) and money was cheap. And we fought a lot about little things that didn't end up mattering when the big tide turned.
MyRichUncle shaped me deeply because I learned that the internet’s disruption of traditional distribution models had rendered for the first time the ability to break into a business which had only recently been dominated by a government sanctioned monopoly (Sallie Mae) and serve consumers better and cheaper.
It also helped me realize how hard it is and how long it takes, and what to look for to know that its starting to work. Startups are like a marathon where you don't know the end. So having clues to know you are gaining ground even when others think you are still losing are really important. Lastly, i learned about the kinds of people who can succeed in such environments, how to find them, and how to help and hold onto them.
CL: If you could model yourself after one founder who would it be and why?
VG: John D. Rockefeller. He took a product that was commoditized but not standardized, oil and built one of America’s largest businesses ever, Standard Oil, the precursor to most of the Top 10 oil companies in america, through vertical integration, standardization, and delivering value to the end consumer.
Elon Musk. For his audacity, his vision, his ability to take ideas and concepts we had abandoned, electric cars, reusable rockets, mars colonies, and through sheer force of will, charisma and relentlessness bring them to life.
Better believes in flipping the customer acquisition strategy from forcing customers hands through a bit of old school intimidation and instead they are putting the customer at the center of all things Better. Like so many innovators, this is a method that is proven to win out in the long term. Better is just getting started and the future is bright, as they build a customer base, legitimacy and notice from prospective customers who are beckoning to hear that there is a better way.
At their core they are bringing hope, confidence and transparency to customers in need of something to cheer about during one of the more arduous experiences in their financial life. Thank you Vishal and the whole Better team for investing in truly Simple.Innovative.Change