Zillow Mortgages Watch: Ramp Up Continues

Zillow’s foray into the mortgage lending arena ramped up in several subtle ways in early 2019 that may not have caught your eye if you weren't watching closely. We’re definitely watching closely at The Mortgage Collaborative.

What Zillow is clearly doing is positioning themselves for the evolving state of real estate transactions and financing. It’s a fine line Zillow is walking, as their strategy of controlling more of the point of sale of both real estate transactions and real estate financing flies in the face of the profitable Premier Agent, Mortgage Marketplace and Zillow Rentals services that produce much of their current revenue. Even before Zillow Offers and Zillow Mortgages, an inherent tension existed between Zillow and many of the realtors and mortgage loan originators that provide that revenue.

But as they say in hockey, Zillow is skating to where the puck is going, not where it’s at currently.

If you don’t think Zillow is going to be a major player in the mortgage industry sooner rather than later, then you aren’t paying attention. Below are some of the more recent developments we’re keeping our eye on.

Zillow is Buying & Selling More Homes

In January, Zillow announced that they were going to start buying and selling homes in five new markets in 2019 through their perpetually expanding Zillow Offers platform. Just nine months old currently, Zillow will be buying and selling homes in at least 15 major metropolitan markets in America by the end of 2019.

Consider this nugget below from Zillow CEO Spencer Rascoff from their Q2 earnings call transcript, which came just after their acquisition of online lender Mortgage Lenders of America:

So just to give you some napkin math for a second. About 400,000 homes sell a month in the United States. If Zillow Offers is buying and selling, say, 10,000 homes a month, that's about 2.5%, 2% or so of the market. If we're doing that type of home buying and selling volume, homebuilders typically have a 75% attach rate on their in-house mortgage of homes that they're selling. At a 75% attach rate on 10,000 homes a month at 9,000 in revenue per mortgage origination, that's $67 million a month of mortgage origination revenue or about $800 million a year. So for anybody who is wondering why we just bought a mortgage lender, just to hit some of those numbers again, at a mere 10,000 homes sold a month from Zillow Offers, a 75% attach rate gets to over $800 million a year of revenue opportunity for mortgage origination.

Analysis: Clearly Zillow will want to control the mortgage loan process and fee income on homes they sell through Zillow Offers, a program they are rapidly expanding.

 Zillow is Displaying the Listings of the Homes They Own Above Others

 Recently, a Zillow spokesperson told real estate media outlet Inman that the company is running “tests” on Zillow.com and its various mobile apps that show its own for-sale homes at the top of its home search pages, ahead of other competing listings. Inman staff performed its own tests that did verify that this was occurring.

Analysis: “Wow, this is a surprising development.” – no one

 Zillow Recently Announced Purported Enhancements to the Accuracy of Zestimate’s

 A little over a year and a half ago, Zillow launched a contest to see if anyone could create an algorithm that could beat the one they were currently using to form “Zestimate’s,” their property value estimation tool. If anyone was successful, they said they’d give them $1 million.

On January 30, Zillow announced that a team of people had succeeded in creating a model that they said bested the Zestimate. The winning team included data scientists and engineers from around the world: Chahhou Mohamed of Morocco, Jordan Meyer of the United States, and Nima Shahbazi of Canada.

Analysis: Zestimate’s are a primary driver of Zillow web traffic, which leads to familiarity with the site, which leads to home searches, which will eventually lead to more Zillow Offers purchases and sales and more Zillow Mortgages business. Smartest million bucks Zillow has ever spent for the publicity alone, if nothing else.

 The Credit Unions Fire a Shot Across the Bow of Zillow

In early January, the National Association of Federal Credit Unions (NAFCU) sent a letter to House Financial Services Committee Chairwoman Maxine Waters (D-CA) and Ranking Member Patrick McHenry (R-NC), calling on lawmakers "to continue to scrutinize the growing fintech sector" to ensure a level playing field between fintech’s and regulated financial institutions.

Analysis: Kudos to NAFCU. Zillow Mortgages should be regulated just as intensely (if not more) than credit unions and community banks given their connection to other aspects of the real estate transaction, the amount of customer data they preside over, and the fact that they’re not subject to the same cybersecurity examinations depositories are under as part of the Gramm-Leach-Bliley Act.

 Zillow Starting to Position Themselves as a Thought Leader on the Lending Side of the Housing Industry

If you spend some time scrolling through the archives of the “Research” page of Zillow’s website, you’ll see an interesting transformation starting to take place. Until about a month ago, Zillow Research was primarily limited to reporting of housing industry related indicators like new and existing home sale data, home appreciation indices, and tracking of the direction of mortgage rates and rents.

Then starting in January, Zillow began posting a series of op/ed pieces and presentations. On January 17th they posted this presentation on the impact of rising rents on homelessness. On January 25th, penned a column on the impact of the government shutdown on USDA rural housing mortgages. And on February 4th, posted a column detailing the results of a joint study done with the National Fair Housing Alliance (NFHA) and an interview with their CEO Lisa Rice. The study, and the conversation with Ms. Rice makes the case that housing discrimination is very much alive, and that redlining and other policies and practices have contributed to a widening in the black-white homeownership rate gap over the past century.

Analysis: Zillow is beginning to attempt to position themselves as a thought leader on housing finance issues, an area they have not penned op/eds on in the past.