Zillow Home Loans to lose significant business following iBuyer shutdown

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Zillow’s implosion Company iBuyer will impact both Zillow Home Loans’ origination and revenue going forward, as it has contributed 70% of its leads.

But even without that business, the Seattle-based company intends to continue marketing its integrated services to home buyers and sellers.

Zillow bought what was then called Mortgage Lenders of America in November 2018 specifically to provide financing to those who buy homes through the Zillow offerings.

The operation, however, was controversial; The National Association of Federal Credit Unions even used the deal as the prime example of why fintechs must be regulated by the federal government.

However, Zillow Offers was a financial disaster for the parent company; the company lost more than $ 380 million in the third quarter. Zillow blamed a flawed algorithm that caused him to overpay for homes at a time when price growth was slowing.

“Zillow still intends to continue with the Zillow 2.0 strategy, but in a more asset-light manner,” said Ygal Arounian, managing director of internet equity research at Wedbush Securities, in a report. “The vision needs to be rebuilt and in light of how iBuying has played out, management will need to rebuild the credibility that they can successfully implement this vision over time.”

Zillow’s mortgage segment, which includes Zillow’s home loans, Mortech and his mortgage Marlet business, reported a 30% year-over-year increase in revenue to $ 70.3 million in the third quarter, from $ 54.2 million a year earlier; in the second quarter, recorded $ 56.7 million.

The third quarter exceeded the range for the company’s earlier outlook, Allen Parker, chief financial officer, said during the earnings call. About 54% of this annual increase comes from origination volume which has more than doubled, while 43% comes from the growth of its lead generation, Custom Quote and Connect activities.

“Mortgage segment [adjusted] EBITDA was $ 5 million positive, compared to the midpoint of our outlook range of a loss of $ 9.5 million, ”he added. Investment bank Stifel expected this line to show a loss of $ 8.2 million. The second quarter recorded a loss of $ 5.9 million, while for the third quarter of 2020 Adjusted EBITDA was nearly $ 16 million.

But Zillow Group recorded a pre-tax loss of $ 5.6 million on mortgages, improving from a pre-tax loss of $ 17.7 million in the second quarter, but down from pre-tax profit. of $ 10.6 million in the third quarter of 2020.

The origination volume was $ 1.1 billion in the third quarter, with $ 359 million in purchases and $ 753.6 million in production refinancing. This is compared to $ 888 million in the second quarter, $ 658 million in refi volume and $ 230 million in purchases. In the previous year, it generated $ 517 million, including $ 163.7 million in purchases and $ 353.4 million in refits.

Going forward, the closure of Zillow offers will have an effect on Zillow home loans. In the third quarter, 70% of his leads were from the iBuying business, Parker said.

“This gives us comfort that financing is a very important part of the relocation process and that having a financing plant that could help serve our clients in a variety of ways is an ability that we need to have when we think serve our customers when they move. Parker continued. mortgages as this volume increases. “

But over the next two quarters, instability in the mortgage industry should hurt its results. Yet “we are currently collecting a ton of mortgage interest from consumers because of our position in the funnel,” added CEO Rich Barton. “And we’re only dealing with a small part of that ourselves with Zillow Home Loans, and we have a market for the rest of them, that puts us in a very good position to innovate here.”

Revenues for the mortgage segment are expected to be between $ 47 million and $ 52 million in the fourth quarter.

“Our outlook for the fourth quarter reflects a slowdown in refinancing activity in the sector due to recent interest rate movements, a slight compression of the spreads on sales and slower growth in impacted buy-outs. by terminating Zillow Offers operations, ”Parker said. “Due to lower sequential revenues and continued investments to increase mortgage origination, we expect mortgage segment EBITDA to be between a loss of $ 16 million and $ 11 million in the fourth quarter. “

Stifel reduced its estimate of fourth quarter mortgage income for Zillow to $ 50 million from $ 65.6 million previously; he also cited the decline in the original volume of purchases as the reason, according to a report by analyst Scott Devitt.

For the full year of 2021, Stifel has reduced its mortgage revenue forecast for Zillow by 2.2% to $ 245 million, but the real impact will be visible in 2022, as Devitt’s latest forecast of 266, $ 9 million is 12.6% lower than its previous forecast of $ 305.5 million. .

Yet Zillow sees the mortgage industry as an integral part of its operations, even though the original reason for buying MLOA no longer applies.

For example, a seller may start by marketing a property through Selling Time, which the company has just acquired. “Then the mover, the seller might want to pre-qualify for the next mortgage or get a mortgage,” Barton said. “Then we want to route the documents and do the closings, titles and deposits, all integrated into the same seamless experience. “

It was through Zillow Offers that the parent company invested in each of these businesses, Barton said.

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