Record-setting loan volume isn’t the only news-worthy thing happening in the lending industry this year. With the mortgage business booming, big-name lenders are increasingly eager to tap into public markets. Rocket Companies was the first to go public this year, raising about $1.8 billion in its IPO. Caliber Home Loans originated $57 billion loans in the first nine months of 2020 and looked to springboard off that success by filing for an IPO in October (only to postpone it due to market volatility). Meanwhile, online lender Better.com, valued at $4 billion after raising $200 million in a Series D funding round, is preparing for an IPO in 2021.
What can this flurry of activity teach the industry’s smaller players about capitalizing their businesses? And how can it inform the way lenders reinvest profits from 2020’s landmark performance?
At the recent MAXOUT 2020 conference, Rob Chrisman, Founder of RobChrisman.com, and Les Parker, Managing Director of Transformational Mortgage Services, sat down with Maxwell Co-founder and CEO John Paasonen to talk about how small to midsize lenders can capitalize their businesses in today’s growth market. Specifically, they spoke about possibilities that exist beyond big-lender IPOs and where lenders can deploy capital to differentiate themselves to investors.
After all, no market boom lasts forever. As a small lender, how can you capitalize on today’s opportunity and grab a piece of the success big-brand companies are enjoying?
Feasible exit strategies for small to midsize lenders
Anyone growing a small to midsize lending business knows IPOs aren’t for most companies. Businesses generally need to be earning $50 million per year to even consider the possibility. This simply isn’t a reality for most mid-market lenders.
Still, capitalization opportunities do exist for smaller players in the mortgage space.
In terms of raising capital, lower-volume lenders might look to the good, old fashioned strategy of asking friends and family. This might mean tapping into family wealth, but it could also include presenting the opportunity to a sister whose business has netted substantial profit or an acquaintance looking to invest their nest egg. While there are risks associated with mixing family and finances, lenders may find they pale in comparison to the downsides of eventually welcoming corporate investment. Giving up majority stake, for instance, might be too high a price to pay for investment, especially if vital concerns like time horizon aren’t aligned.
Another option for lenders too small for an IPO is allowing a special purpose acquisition company (SPAC) to take the company public. Sometimes called “blank check” companies, SPACs use rollup strategies to allow investment in private equity type transactions. In other words, a SPAC acquiring a few mortgage companies can provide a route for smaller lenders to go public.
Excess capital? Spend it where investors will notice
Many small to midsize lenders aren’t looking for an exit strategy yet and are simply focused on making money while they can. There’s nothing wrong with that, especially in 2020’s unprecedented conditions. Still, you’ll ultimately need to decide what to do with this year’s excess capital. If you’re wondering whether to invest in technology, training, retention, or otherwise, the important question to ask is: How do I build a sustainable, standout business that differentiates itself to potential investors in the future?
As Rob Chrisman stated at MAXOUT, “As an investor, what little (or big) thing differentiates your company from somebody else? That’s where I think CEOs need to focus. Why am I different from the guy or gal up the street? What is it about me that’s going to attract an investor?”
Taking cues from big-name lenders in the process of seeking high-valuation IPOs, here are four areas where you might consider deploying capital to attract the attention of equity investors down the road.
An easy way to deploy capital and up your game is by investing in the tech you use. While this upgrade may seem straightforward, there are some vital considerations to keep in mind when choosing a technology partner, including flexibility, customization, communication style, and support capabilities. Even the best technology won’t help differentiate you if you don’t use it to drive efficiencies, increase productivity, and otherwise find an edge over your competitors.
At Maxwell, we design our suite of tools specifically to help small to midsize lenders grow and offer extensive onboarding, training, and day-to-day troubleshooting. We do this because we know a one-size-fits-all solution doesn’t work for most lenders—and we succeed when our customers drive metrics-driven wins that help them stand out.
2. Customer service
Most lenders use a similar, classic loan origination model. Because loan offerings tend to be standard throughout the industry, the next logical place to create differentiation is in the borrower experience. Regardless of size, you should be asking yourself: How are we engaging with our customers? How do we make a customer’s interactions with our team stand out above what they might experience with other mortgage lenders? If you’re able to create raving fans through the relationships you build, you’ll gain long-lasting differentiation attractive to future investors.
Need to revamp your customer experience? Maxwell Head of Client Enablement and 16-year mortgage industry veteran Amy Jo Plummer advises to prioritize genuine, face to face interactions if at all possible.
“Building relationships during COVID is tough. Whenever possible, get your customer’s face on that screen if you can’t be in person, and tune out everything else!” she says. “Of course, you never want to push your on-camera preference too much, but seeing facial reactions, expressions, etc. is such a key piece of understanding what’s being conveyed to you. Meeting face to face is also instrumental to forming a solid relationship that predicts long-term success.”
Future investors will be concerned with examining any lending company’s marketing strategy and spend. Why? This budget line item is important for investors to understand your business’s growth trajectory. In ultra-competitive markets, a dedication to marketing, brand recognition, and a functioning lead pipeline can be a valuable differentiating factor.
Take Quicken Loans, whose parent company is Rocket Companies. They reportedly spent a staggering $905 million on marketing in 2019 alone—a bold move that helped propel them to IPO. While this kind of budget is clearly out of reach for smaller lenders, the strategy illustrates the importance of capturing market share through marketing and advertising efforts. Those allocating a smaller spend might focus on reaching a smaller, more focused audience, including local prospects and referred leads.
4. Market segments
A recent trend among larger lenders is to cater specifically to underserved demographics. This might mean improving user experience for certain communities, revising the language in marketing or onboarding materials, or offering educational content for first-time home buyers. Regardless, specializing in specific market segments will give you an edge over wide, unfocused strategies.
Freedom Mortgage, for instance, caters to underserved home buyers through their 203k offering, which allows borrowers to take out one loan to pay for both the purchase price of the home and the costs of repairs. Similar to other FHA products, the 203k loan is geared towards helping provide credit to creditworthy borrowers who fall outside of the normal credit spectrum. These loans and others help Freedom Mortgage differentiate itself from other brands for certain demographics of home buyers.
[Listen to the Clear to Close podcast episode 013 with Cultural Outreach Founder Kristin Messerli for tips on catering to Millennial first-time homebuyers and other underserved demographics.]
Invest profits to future-proof your business
It’s hard to find time in today’s frenetic environment to think through big-picture questions like where to allocate spend in 2021 and beyond. Fast-growing lending businesses with high-dollar IPOs might not seem relatable, but they provide valuable lessons for smaller lenders looking to capitalize or simply differentiate their brands from the pack.
No matter where lenders choose to spend their hard-earned cash, they need to think through the same questions future investors will ask about their company: What’s this lender’s edge? How proprietary is that edge? How long can it last?
Along with these four vital business segments, Rob and Les discussed other tips helpful for any small to midsize lender looking to capitalize their business now or over the next several years, including:
—Why your business model is vital to attracting equity investors—and what you can do to make it attention-worthy
—What drives valuations of lending companies
—Why investors are uniquely attracted to the mortgage industry
—The pros and cons of welcoming outside investment in your company
—How to put your best foot forward towards a profitable exit strategy
Want to gain an edge and build a sustainable, standout business? Don’t miss this timely advice!