Riding a pandemic-fueled housing boom: Inside startup Better’s ascent

The pandemic economy has thrown all of us for a loop. GDP in the U.S. contracted at a record pace in the second quarter, and unemployment reached its highest rate since the Great Depression.

But through it all, one major engine of the economy has been roaring: housing.

That’s good news for Vishal Garg, founder and CEO of mortgage lender Better.com. Ten years ago, the entrepreneur was licking his wounds amid the rubble of the financial crisis, mourning the collapse of his student-lending venture, MyRichUncle. Today, Better is one of the country’s fastest-growing startups, an undeniable pandemic winner, and a newcomer to the LinkedIn Top Startups list — debuting in the No. 1 spot.

Better is benefiting from a convergence of trends: Thanks to the Federal Reserve, which in March dropped its benchmark interest rate to near zero, the cost to borrow for homebuyers is lower than ever. Add to that a collective restlessness among now-remote workers — along with the sober conclusion by many that urban living is no longer for them — and the U.S. housing market has been on fire, with home sales surging in recent months by the most on record.

For Garg, starting Better was personal. In 2013, when he and his wife were looking to buy their first apartment in Manhattan, they struggled to find a realtor they trusted and an apartment near a nursery for their son. Then came the mortgage process.

“It was so much harder than it should be — like, horrendously bad,” said Garg, who at the time was professionally managing billions of dollars in mortgage-backed securities and whose wife was a banking executive. “We lost the apartment because our mortgage company couldn’t move quickly enough. I thought, ‘If it’s so bad for us, how bad is it for everybody else?’”

He studied the mortgage process beginning to end, discovering practices that he thought were slow, arcane, and opaque. The system, he believed, was rife with opportunities for knowledgeable participants to extract fees from unaware homebuyers.

And so, in 2014, Garg used the money that would have been his apartment’s down payment to start a ‘better’ mortgage company.

Early skeptics

Garg and a small team partnered with, then acquired, a California-based mortgage lender, giving them the licenses required to originate home loans. Led by CTO Erik Bernhardsson, who had built Spotify’s acclaimed music-recommendation engine, they developed algorithms to match borrowers and their specific loans with institutional investors, such as banks and insurance companies, that would ultimately buy the mortgages. The premium they could charge such institutions for more precisely satisfying their investment criteria would allow Better to cut out commissioned loan officers and eliminate lender fees for the homebuyer.

Not everyone was convinced.

“We would meet with all these mortgage investors, and immediately they would say, ‘You’re not going to do any loans without commissioned loan officers,’” said Garg.

People kept trying to convince the entrepreneur that, rather than be a lender, the company would be better off licensing its software to existing mortgage brokers and loan officers — a business-to-business, or B2B, model.

Garg refused, adamant in his belief that commissioned brokers and lenders undermine the homebuyer. His team pressed on, and toward the end of 2015, they funded their first fully digital loan — no phone calls or heaps of paper involved. Better Mortgage launched publicly in early 2016.

Almost immediately, startup investors were intrigued.

“We just knew we had to back Vishal,” said Jesse Beyroutey, a partner at IA Ventures, which invested in Better’s first outside funding round in June 2016. “The traditional mortgage process is death by a thousand cuts. He and his team were the only ones thinking about properly systematizing it.”

Better has since raised more than $250 million in funding to fuel its growth. On top of venture capital firms, the roster of backers features several blue-chip companies, including Goldman Sachs, Citigroup, Ally Financial, and American Express. Both Ally and American Express have begun to integrate Better’s platform directly into their own mortgage offerings.

“Vishal doesn’t back down to a challenge,” said Lindsay Fitzgerald, a managing director in the venture capital group at American Express.

‘Working 24/7’

Garg isn’t afraid to dream bigger, either. Several of his investors described their early meetings with him as fundamentally reshaping their perspective not just of the $10 trillion U.S. mortgage market, but of how to buy a home and what it means to own one — from the roles and incentives of realtors and insurers to, one day, the prospect of financing everything inside and around a house.

Like many technology entrepreneurs, Garg derives inspiration from Amazon. He views the e-commerce titan’s innovation as matching buyers and sellers in a way where the former benefits from greater choice and the latter from a wide customer base. Meanwhile, both buyer and seller can take advantage of a digital platform that removes friction — and therefore cost — from the process. He tried to build Better in that image, using technology to match borrowers and their mortgages with the end investors.

Garg also applied lessons from his past missteps. The demise of MyRichUncle stemmed from a reliance on only a handful of institutions to buy its loans, most notably the ill-fated Merrill Lynch and Lehman Brothers. With Better, Garg has enticed almost three dozen of the largest mortgage investors to the platform.

“He had learned from his previous startups, some of which worked better than others,” said Howard Newman, a longtime private equity investor whose firm, Pine Brook, has repeatedly funded Better. “He knew many of the pitfalls involved.”

One unforeseen pitfall for many businesses — the coronavirus pandemic and resulting recession — has been anything but for Better.

On the afternoon of Sunday, March 15, following one of the most volatile weeks in U.S. stock market history, the Federal Reserve announced it slashed its benchmark interest rate to a range of 0-0.25%. While the central bank doesn’t set mortgage rates, the ripple effects of such a cut indirectly lead lenders to lower the costs of consumer borrowing, including mortgage rates.

Almost immediately, Better experienced a surge in demand for mortgage refinancings. Applications for new mortgages followed. Within three months, borrower demand had tripled. The company is now lending about $2.5 billion a month, according to Garg.

“Volumes went through the roof,” he said. “We were working 24/7 — we still are — to satisfy customer demand.”

Future IPO?

To keep up, the startup is hiring at a breakneck pace — onboarding new team members virtually as the pandemic rages on. About half of Better’s 4,000 employees have joined since March, according to Arthur Matuszewski, its head of talent. Most are in sales and operations roles, which comprise 80% of positions at the company. In the next 12 months, Garg said he wants to bring on 7,000 more people.

“We look at human capital as a top-line function, not an expense line,” said Matuszewski. “Headcount is directly tied to our revenue growth — we teach our people and then they help more customers buy the homes they want.”

Managing such explosive growth while remaining nimble during the pandemic will be demanding, said Pine Brook’s Newman. “When you’re running a business this hard and this fast, the challenge is to execute without creating problems,” he said. “So far, Vishal has handled that very well.”

Better also has fierce competitors, from rival digital mortgage companies such as Quicken Loans to megabanks increasingly shifting their customer experience online. Quicken Loans parent Rocket Companies went public last month, raising $1.8 billion, and is now valued by public investors at $43 billion.

“They’re not the only ones that are trying to solve this problem,” American Express Ventures’ Fitzgerald said of Better. “But this is a huge problem that affects many people, so the market is big. And there’s nothing incremental about what Better is doing.”

An IPO is likely in the startup’s future — though, with obligatory emphasis, Garg said he’s not allowed by regulators to comment on such plans. What he would say is that he believes the benefits of going public are better than ever, and he thinks consumers should have the ability to own stakes in companies whose products they use.

In the meantime, there’s a lot more work to be done, Garg noted, as he prepared to jump to yet another Zoom meeting.

“We’re just getting started,” he said. “The future is coming faster.”