The Zillow Bomb

In news that should surprise absolutely no one, Zillow announced earlier this week that they’ve entered into an agreement to buy Mortgage Lenders of America, an online direct to consumer mortgage lending company with over 300 employees that’s based just outside of Kansas City, MO.

In typical TMC fashion, let’s cut right through all the fluff and talk about what this means and what is likely to happen.

The Zillow press release on this acquisition was very carefully worded, and for good reason. Zillow makes lots of money from mortgage lenders like many of you reading this that advertise on their platform. And even more money indirectly from mortgage lenders that help sponsor “Premier Agent” listing pages through a “co-marketing” plan that allows mortgage lenders to be featured on the same page as the agent. It was this program that the Obama CFPB tried to take down and the program that the Trump CFPB recently ended its investigation of.

Here’s one quote from the press release:

"Getting a mortgage can be the toughest, most painstaking and time-consuming part of the home-buying process," said Greg Schwartz, president of media and marketplaces at Zillow Group. "Now that we are buying and selling homes through Zillow Offers, we believe that having our own mortgage origination service as an option for consumers will allow us to streamline the process for people who buy a Zillow-owned home. Over time, we expect the work we do in conjunction with this new line of business will help us expand our offerings to our partners - including real estate brokers with existing in-house mortgage operations and third-party lenders who co-market with Premier Agents."

TRANSLATION: Zillow makes a lot of money selling leads to mortgage lenders and ads to real-estate agents that are partially paid for by mortgage lenders. That revenue is vital to the company; thus, they’re positioning this acquisition as an immediate solution for their “Zillow Offers” program they launched about 18 months ago that allows home sellers to list fix & flip homes on Zillow. The quote goes on to tease potential synergies with real-estate owned mortgage companies (on the rise with a defanged CFPB) and the other mortgage lenders that co-market with their Premier Agents (pay for their ads).

REALITY: All acquisitions are carefully worded to mitigate fallout. This is a clear play into the online direct to consumer mortgage space by Zillow. At 160 million monthly visitors and climbing, Zillow will always be able to get real-estate agents to advertise with them, as the service has ROI value to average and above average realtors. That revenue will not go away, even if less third-party mortgage lenders ultimately contribute to Premier Agent costs. The revenue upside of being able to originate mortgages themselves through the acquisition of a large and functional 100% online lender is far greater than the potential loss of advertising dollars from lenders. Being able to have greater control over the financing component to home sales is clearly valuable. And this is likely a precursor to future acquisitions of “in-house” real-estate owned mortgage companies, which are starting to become far more prevalent.

The stock market doesn’t like it because the stock market doesn’t like the mortgage industry right now. Rates are on the rise, many feel the housing market has peaked, the housing inventory issue is real, and investors still are weirded out by government’s perpetually uncertain role in housing and still have memories of the famed Mortgage Meltdown. I’d be buying Zillow on the dip as a long term hold.

The question we’ve received most from our lender members is around the longer term impact of this. Evidenced by the fact that Quicken is now America’s largest mortgage lender, each year, an increasingly larger number of home buyers are OK with a fully online home financing process. Zillow has a ridiculous online audience that’s kept growing since their 2015 acquisition of Trulia, lots of resources, and great brand recognition. I see this as being the first of a series of acquisitions in the mortgage lending space for Zillow, and a further catalyst for the industry towards increased online originations and reduced margins for mortgage originators.

Many have also commented that the next domino to fall could be the long-rumored entrance of Amazon into the mortgage space. However, as astutely laid out in this excellent column from Forbes, the mortgage industry is not really a good fit with Amazon’s current strategy and brand.

One thing is certain though. There’s never a dull moment in the mortgage industry.