With mortgage rates rising to their highest levels in more than two decades, it might not be the best time for Better Home & Finance, a mortgage origination company, to go public via a deal with a special purpose acquisition company, or SPAC.
But that’s exactly what it’s doing. Investors should approach the stock with caution.
Better completed a merger with
Aurora Acquisition Corp.
(ticker: AURC), a SPAC, on Tuesday. Shares and warrants of the combined company will begin trading on Thursday, under the tickers “BETR” and “BETRW,” respectively. Better will effectively take over the SPAC’s stock listing, while
Aurora
will cease to exist.
The primary motivation is funding, Better CEO Vishal Garg told Barron’s, referencing $565 million in capital, the bulk of which is in convertible notes from affiliates of
SoftBank
(9984.Japan). “We think that we have amazing growth prospects ahead,” Garg said, adding, “particularly as interest rates come back down or normalize.”
Better says it offers mortgages that are 0.45 percentage point lower than other originators, and a 24-hour turnaround from application to commitment letter. One of the sources of these savings is its “supervised learning engine,” which matches customers to the most appropriate loan product for them by analyzing customer data against rules for different types of mortgages, Garg said.
The company said it would use the SPAC-deal proceeds to further develop its loan origination platform and improve efficiency.
At Aurora’s closing price of $17.45 on Wednesday, investors are valuing Better at a sky-high $14 billion based on the post-merger fully diluted share count in the SPAC’s latest securities filing. That’s for a company that had only $383 million in revenue last year and lost $889 million. Aurora and Better declined to comment on Better’s valuation.
Lower mortgage rates would improve the company’s financials, Garg said—“but even in the current market environment, we’re getting more efficient and that’s lowering our burn rate.”
It has been a long, winding road for Aurora and Better to close their merger. The SPAC and the company originally agreed to merge in May 2021 and have amended their agreement five times since then.
Meanwhile, Better has had to contend with a recent rate environment that hasn’t been kind to mortgage originators. Ultralow mortgage rates spurred a home buying and refinance boom in the early years of the Covid-19 pandemic.
But 2022’s rapid rise in rates caused mortgage loan whiplash. Mortgage origination dollar volume sunk to $2.3 trillion in 2022, according to the Mortgage Bankers Association, almost half of the $4.4 trillion originated in 2021. The average 30-year fixed-rate mortgage ended 2022 at 6.4%, according to Freddie Mac, more than double the average rate at the end of 2021.
At the time of the merger announcement in May 2021, Better’s management projected that the company would generate $123 million in net income that year. It later reported a loss of $304 million for the year. Better has also gone through some management controversy and laid off thousands of employees.
Better referred Barron’s to an August SEC filing that recommended no enforcement action in response to a former employee’s lawsuit.
In reference to layoffs, a spokesperson said in an emailed statement that “while the cuts we made were difficult, we acted early and made decisions that were prudent for the long term growth of the business.”
A SoftBank affiliate agreed to put up $750 million in the form of a convertible note in late 2021 that can be swapped for Better stock at a discount once the company is publicly traded. SoftBank had earlier invested $500 million in Better’s Series E funding round, which valued the company at $6 billion in early 2021.
SPACs raise cash from investors in an initial public offering—Aurora went public in March 2021, raising $220 million—and then trade on an exchange like any other stock.
Their management team, called sponsors, has a limited term of usually two years to negotiate and close a merger with an operating business like Better. Once the SPAC and the company merge, the company takes over the SPAC’s stock listing and gets access to its cash—going public and raising money in the process.
The delay in closing the deal required Aurora to ask shareholders for permission to extend its deadline in February. The SPAC also gave them the option to redeem their stock for a proportionate share of the SPAC’s cash. About 93% of shareholders did so, leaving Aurora with less than $21 million in its trust account—and 97% of remaining shares held by management.
The SPAC is still the vehicle taking Better public, but it’s not the source of financing it once was. The money raised in the deal will come in the form of a second convertible note from a SoftBank affiliate.
SPAC mergers have become less common compared with their boom in 2020 and 2021. As of Aug. 22, there had been 52 closed SPAC mergers year to date, according to a Dow Jones Market Data analysis of Spacresearch.com data. That’s down significantly from the 108 that had been completed by this time in 2021, during the height of the SPAC boom.
Mortgage demand also isn’t what it used to be: Both home purchase and refinance application volume have dropped well below their booming levels in 2020 and 2021, Mortgage Bankers Association data show.
That has weighed on earnings of publicly traded originators: Detroit-based
Rocket
(RKT) went public in mid-2020 and has a market value of $21 billion. It reported net income of $700 million on revenue of $5.8 billion in 2022, down from net income of $6.1 billion on roughly $13 billion in revenue in 2021.
LoanDepo
t (LDI), an originator with a roughly $607 million market capitalization that went public in 2021, reported a $610 million net loss in 2022 on $1.3 billion in revenue. That was a reversal from a $623 million profit in 2021 on $3.7 billion in revenue.
UWM Holdings
(UWMC), known as United Wholesale Mortgage, went public via a SPAC merger in early 2021. It reported net income of $932 million on revenue of $2.4 billion in 2022, down from net income of $1.6 billion on revenue of nearly $3 billion in 2021. It has a market capitalization of $17 billion.
Yet mortgage originators have recently gotten a second wind. Even as the Mortgage Bankers Association expects mortgage value originated this year to fall to $1.7 trillion. Rocket,
LoanDepot,
United Wholesale are up 48%, 20%, and 67%, respectively, this year.
Shares of public mortgage origination companies, such as Rocket and United Wholesale Mortgage, gained earlier this year as quarterly earnings came in better than expected, says Bose George, a KBW managing director covering the mortgage finance sector. “Our thought was that the rally was a little overdone,” George says, citing expectations that higher mortgage rates will weigh on mortgage originations as the industry moves into its typically slower time of year.
Write to Shaina Mishkin at [email protected] and Nicholas Jasinski at [email protected]
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