Regular readers know that I have said that Opendoor could be the most important company in real estate. My reasoning was that Opendoor looked to be trying to revolutionize the single biggest painful aspect of buying a home: the mortgage. Here’s what I wrote:
So yeah, I think Opendoor is about revolutionizing the entire culture around how homes get bought and sold in the United States by replacing the broken mortgage financing system with an institutional market maker system. Do that, and you can’t help but impact the pain-in-the-ass homebuying and selling system since the latter rides on the shoulders of the former.
If it pulls this off, Opendoor will become the single most important company in real estate. Hell, it could become the single most important company in banking, in much the same way that Uber has become the single most important company in transportation and logistics, not just in taxi and black car industries.
Well, yesterday, Inman reported that Opendoor is launching a mortgage brokerage division:
Opendoor, the property-exchange platform that’s raised $320 million, is launching a mortgage brokerage that could connect buyers with loans to purchase its homes.
The operation could help the company offload its property acquisitions at a faster clip while opening up a new revenue source. It also highlights a strategy real estate brokerages are increasingly using to streamline the transaction process.
I was interviewed for the article by the reporter, Teke Wiggins. But afterwards, and even after the article was posted, I got to thinking about Opendoor even more. I think I’ve figured out what they’re doing, but not in time for it to be helpful to Teke.
So let me at least do it here for the best informed audience in real estate.
Opendoor’s Mortgage Play
I was quoted in the article speculating on what Opendoor was doing, but given space limitations, my full rambling what-if couldn’t possibly be printed. Well, that full observation is this: if Opendoor is just setting up a mortgage brokerage and nothing else, this really isn’t that interesting from an industry standpoint. Many a brokerage has mortgage operations, whether as an affiliate or something more significant. Inman has discussed one such operation from Redfin in the past. So Opendoor doing a mortgage brokerage is so much meh.
What is interesting, however, is if Opendoor is going to sneak in a seller-financing backdoor to its mortgage platform. That is, imagine the process/flow here. You’re a buyer, you go to Opendoor, find a house and decide to buy it. You then connect to Opendoor Mortgage, who shops your deal to lenders. But, one of the options is, “Would you like to close in seven days? We can finance your purchase directly!”
That is not so much meh. That is all kinds of holycrapsupernova. It changes the world.
Caveat: Laws & Regulations
While I am a retired member of the New York Bar, I am not a practicing lawyer. Plus, this whole area of the law is hellaciously complex involving Dodd-Frank, CFPB, loan originator rules, and so on and so forth. So if you’re curious, call your attorney and ask real questions.
Having said that, I spoke with a mortgage expert, my friend Don Stolan of Commerce Home Mortgage in Newport Beach, CA about some of the laws and regulations around seller financing. The main points he explained are these:
- All residential mortgages have to be done by someone with a loan originator license.
- The exceptions are for seller-financing under certain strict limitations, the biggest of which is that an entity (not a natural person) can only do three seller-financing deals in a year before they are considered a loan originator and subject to all of those regulations.
- However, if you do have a loan origination license, then there is no limit to how many seller-financing deals you can do.
- Even in seller-financing, you have to follow the various RESPA disclosure laws like Truth In Lending Act and providing loan estimates and all of that.
- Furthermore, the loan itself can’t (well, shouldn’t, as I explain below) have weird features like negative amortization that regulators will find triggering.
- Finally, you have to do some work to comply with the Ability to Repay regulations, including keeping your due diligence on file for the CFPB or other regulators to review.
The core concept here is that the regulators are concerned about predatory lending, where unscrupulous businesses fool borrowers into loans they can’t possibly repay, and then foreclose on them or charge exorbitant fees and/or interest. So avoid predatory lending, disclose everything you should disclose, and do some level of Ability to Repay due diligence, and you’re in the clear legally speaking.
The CFPB and the mortgage regulators aren’t so concerned about you, big ass financial company, losing money. They’re concerned about the borrower. Other regulators, especially banking regulators, might be far more concerned about traditional commercial banks and mortgages because those banks are using depositor money for their loans. But when it comes to big rich companies with big cash war chests, the government doesn’t really care all that much if you lose your shirt over a deal.
Practically speaking, this means that as long as you comply with disclosure laws and with the Ability to Repay rules (which are designed to prevent predatory lending), you can have whatever loan underwriting requirements you want.
Therefore, a company like Opendoor can choose whatever underwriting standards it wants for its own properties using its own money. Regulators aren’t going to care all that much.
And that, in a nutshell, is why Opendoor is opening a mortgage operation: so that it can be a licensed loan originator, and offer seller financing to all of its buyers. That in turn could usher in the Market Maker Age of real estate, which is pure disruption, 110%.
Think Out Loud on the Market Maker Age
Let’s assume for the sake of discussion that the Trump administration doesn’t find a way to kill off CFPB and Dodd-Frank. Let’s assume that the current regulatory regime remains largely intact as is, because Republicans have never shown the kind of backbone to roll back government even when they were in power.
The question is, what is the role of the real estate agent in the market maker age?
The Market Maker Age means that every house will have a Bid and an Ask price, set by the market maker (Opendoor). The market maker sets those prices based on a super smart algorithm fed with huge boatloads of data, including real-time demand. We already know how that works for the seller, since Opendoor is and has been doing that for some time now with thousands of homes purchased sight-unseen in a couple of markets. What about the buy-side?
Well, the buyer finds a house, and then simply places an order for that house with Opendoor. When he places the order, the next question is, “How would you like to pay for this house?”
One of the payment options will be Get A Mortgage. That in turn splits into:
- Apply for a conventional bank mortgage;
- SuperFast Opendoor Mortgage and Close In A Week!
Either way, you go into something very much like RocketMortgage where you put in some basic information and authorize linking to your financial institutions.
On the mortgage brokerage side, that means you get a pre-qualification letter that is pretty rock solid. On the SuperFast Opendoor Mortgage side, it means you get an actual loan approval document with all of the disclosures and appropriate waiting periods and whatnot.
A week later (or however long regulations require), you have closed and are moving in.
In this system, as I asked above, what is the role of the real estate agent?
Would the agent be required to place an order with Opendoor in the first place? That seems counterintuitive in the age of online stock trading platforms. What about negotiations? Well, in a Bid/Ask system, how much negotiation could there be? Either you want the house at $X or you don’t. Opendoor isn’t a super-motivated seller willing to cut deals because he has been relocated to another city and has to start his job in three weeks. The transactional paperwork, one assumes, would be handled entirely by Opendoor’s transaction platform. The mortgage is handled, as we see above. Providing recommendations to other service providers (e.g., home insurance, title, whatever) is simple to do for a big website that already owns your entire transaction process. What is there left for the agent to actually do?
And if there isn’t anything left for the listing agent to do, since a seller can simply accept Opendoor’s Bid price and close in three days, and nothing left for the buyer agent to do, since a buyer can just accept Opendoor’s Ask price and close in ten days… what use is the MLS? Zillow? Brokerages? Franchises? Opendoor itself can cooperate and compensate until the cows come home, but if the buyer and seller decide they don’t need to go through all that jazz, what then?
In case you were wondering what real disruption looks like, it looks like that. Putting listings on a website disrupts newspapers maybe, but it isn’t disruptive like the Market Maker Age would be disruptive.
In the Meantime…
Note that Opendoor’s mortgage play could and likely would make money the traditional way while that whole Market Maker thing is ramping up. There are thousands and thousands of mortgage brokers today, who make a good living originating loan applications to lenders. Many a brokerage makes far more profit from its mortgage affiliate than it does from the real estate brokerage operations. So it isn’t as if Opendoor has to make the seller-financing thing work to make money; it can and will make money just from helping buyers on its properties find loans.
And in the meantime, Opendoor poses no threat whatsoever to the brokerage industry. Since its goals are not to disintermediate the real estate agent, Opendoor can and will offer cooperation and compensation to everybody. Instead, it just becomes this slightly strange buyer and seller in every market where it operates. Its listings will be on the MLS, and it will compensate buyer brokers. So brokerages will ignore it and focus on the daily task of recruiting more bodies to their companies.
Mortgage brokers might have a slightly different challenge, but then again, that business is cut-throat competitive as well. It isn’t as if mortgage brokers haven’t faced turmoil in the past decade and figured out how to survive and make things work. They have. So they’ll just treat Opendoor Mortgage as yet another competitor and life will go on.
And the MLS world will largely ignore vague potential threats from the future because it always has. Seriously, when was the last time your local MLS was proactive in dealing with a possible something wicked this way comes type of a thing, instead of reacting a year or two after the bomb dropped?
I suspect that the tech companies, at least the good ones used to the pace of change in technology and what those could mean a year or three down the road, are paying attention. And I suspect that Wall Street and its hedge fund brethren are intensely interested in what’s going on, but they’ll never let the rest of the world in on that.
Of Course, I Could Be Dead Wrong
I have no special insight here into anything. I haven’t spoken to Opendoor, haven’t spoken to regulators, only consulted with a mortgage expert to understand the rules around seller financing. Maybe Opendoor and its billionaire founders and backers have never thought of such a thing, and just wanted to make a few extra million bucks from referring mortgage leads to Wells Fargo and the like.
If so, they probably should call me immediately to consult with them. But I don’t think I’m holding my breath waiting for the phone to ring, since I strongly suspect they’re really, really smart people and have thought this angle through and through.
So for the defenders of the status quo, and for the “you don’t understand how real estate works, Rob” crowd… relax! I’m probably dead wrong.
But what if I’m not?