Better Home & Finance Holding Company (BETR) Earnings Call Transcript & Summary

Hello, and welcome to the Better Home & Finance Holding Company Fourth Quarter and Full Year 2024 Results Call. [Operator Instructions] I would now like to turn the conference over to Hana Khosla, Vice President of Corporate Finance and Investor Relations. You may begin.

Welcome to Better Home & Finance Holding Company's Fourth Quarter and Full Year 2024 Earnings Conference Call. My name is Hana Khosla, and I am the Vice President of Corporate Finance and Investor Relations at Better. Joining me on today's call are Vishal Garg, Founder and Chief Executive Officer of Better; Kevin Ryan, Chief Financial Officer of Better; and Ryan Grant, Co-Founder and President of Retail Lending at NEO Home Loan. In addition to this conference call, please direct your attention to our fourth quarter and full year earnings release, which is available on our Investor Relations website. Also available on our website is an investor presentation. Certain statements we make today may constitute forward-looking statements within the meaning of federal securities laws that are based on current expectations and assumptions. These expectations and assumptions are subject to risks, uncertainties and other factors as discussed further in our SEC filings that could cause our actual results to differ materially from our historical results. We assume no responsibility to update forward-looking statements other than as required by law. During today's discussion, management will discuss certain non-GAAP financial measures which we believe are relevant in assessing the company's financial performance. These non-GAAP financial measures should not be considered replacements for and should be read together with our GAAP results. These non-GAAP financial measures are reconciled to GAAP financial measures in today's earnings release and investor presentation, both of which are available on the Investor Relations section of Better's website and when filed in our annual report on Form 10-K filed with the SEC. More information as of and for the period ended December 31, 2024, will be provided upon filing our annual report on Form 10-K with the SEC. I will now turn the call over to Vishal.

Thank you, Hana, and welcome to our fourth quarter and full year 2024 earnings call. We appreciate everyone joining us today and for your continued support as we drive towards our mission to make homeownership better, faster and easier for our customers by building a technology platform that revolutionizes the homeownership experience. We continue to make good progress towards our vision in which every customer can seamlessly buy, sell, refinance, ensure and improve their home digitally, online, instantly. I'd like to start by highlighting some of our key achievements. We went into 2024 with the goal of leaning into growth and AI to drive increased volume and revenue, balanced with ongoing efficiency improvements, diversification of our distribution channels and corporate cost reductions. We executed against these objectives, growing full year funded loan volume by 19% year-over-year, revenue by 50% year-over-year and reducing our adjusted EBITDA losses by 26% year-over-year. We made some big bets in Tinman AI and launched a distributed retail channel through NEO powered by Better. Both of which are showing early positive momentum. Even in a market that remained challenged with historically low housing affordability and persistently high mortgage rates, we made progress in 2024 against the road map we set out at the start of the year. For the full year 2024, we did $3.6 billion in funded loan volume, $108 million of revenue and had an adjusted EBITDA loss of $121 million. In the fourth quarter, funded loan volume was $936 million, a year-over-year increase of 77% driven by growth across all 3 main product categories: purchase, refinance and second lien loans. On a sequential quarter-over-quarter basis, funded loan volume was down approximately 10%, given normal seasonal slowness in the fourth quarter purchase market. Q4 revenue was $25 million compared to $18 million in the fourth quarter of last year and $29 million in the quarter prior. We continue executing on strategies to increase conversion through additional products and services as well as improved sales efficiency to drive higher customer pull-through. Through 2024, we continue to increase revenue per loan through pricing and marketing channel optimization, resulting in year-over-year gain on sale margin improvement from 1.95% in 2023 to 2.17% in 2024. As we look forward to 2025 and beyond, our strategic priorities remain largely consistent with those we've discussed with you on prior earnings calls. Our first priority is continuing to thoughtfully lean into growth against which we showed progress through 2024. In the fourth quarter, year-over-year funded loan volume growth was driven by increases across all 3 of our main product categories with home equity products and refinance loans being the largest growth drivers. Year-over-year purchase loan volume increased 25% and refinance loan volume increased 611%, from what was a seasonally and historically low quarter at the end of 2023. Our year-over-year HELOC and home equity loan volume increased 416% in the fourth quarter of 2024. TransUnion recently reported that the overall number of HELOC and HELOAN originations increased 10% in the third quarter, whereas Better grew origination volume in the third quarter by 619%. So HELOC market trends remained stable or even improved in Q4. We believe that our current triple-digit growth is continuing to outpace the industry in the fourth quarter as our superior offering drives gains in market share. On a sequential basis versus Q3, Q4 refinance volume increased 34%. Home equity loan volume increased 3% and purchased loan volume decreased 10% due primarily to seasonally slower home buying in the fourth quarter of the year. While the mortgage market saw improvement in Q4 compared to the same period in 2023, 30-year fixed rate mortgage rates remained in the high 6s to low 7% range, putting continued strain on mortgage demand. We expect near-term rates to remain elevated, driving continued demand for our home equity products. Our second priority is continuing to reduce expenses and improve operational efficiency with the goal of reaching profitability in the medium term. In the fourth quarter, total expenses remained approximately flat versus Q3. However, included in these was approximately $17 million of nonrecurring restructuring expenses attributed primarily to the wind down of our U.K. businesses as well as approximately $4 million associated with the termination of certain leases. Excluding these onetime expenses, total expenses decreased approximately 24% quarter-over-quarter due to expense management initiatives across all major expense line items, we reduced adjusted EBITDA losses by approximately $11 million or 28% in Q4 compared to Q3, even with lower revenues due to a seasonally slower quarter. Specifically, we decreased our loan origination expenses by 28%, decreased our compensation-related expense by 21%, and decreased marketing and advertising by 27%. Compared to an only 10% decline in volume, demonstrating the impact of the AI and automation initiatives that drove operating leverage within the business. Utilizing Tinman capabilities, we have been able to automate time and labor-intensive components of the mortgage process and reduce our cost to originate by over 35% of the industry average. We believe our continued investments in technology and AI will significantly drive down costs further, resulting in improved operating efficiency and superior customer experience. Continuing our discussions from the past 2 quarters around our investments in AI, we are seeing benefits from further expanding Betsy, the first AI voice-based loan assistance for the U.S. mortgage industry, which leverages large language models to take a customer through pre-approval and now rate quote and rate lock autonomously. Betsy's program to verbally communicate with consumers to answer mortgage application inquiries and to collect and verify outstanding application data, similar functions traditionally performed by sales staff with the goal of enabling faster service times, enhanced self-serve capabilities improved customer engagement and greater sales efficiency. In terms of tangible numbers, Betsy went from approximately 5,000 customer interactions in June of 2024 to completing over 115,000 consumer interactions in February 2025, a growth rate of over 20x, all while we kept increasing the range of functions that Betsy performs. Last quarter, we shared with you an early clip of Betsy interacting with a customer on our call. We are excited to now show you a demonstration of Betsy taking a customer all the way through mortgage rate lock, which would traditionally have involved separate conversations with up to 3 sales team members and multiple phases of manual data entry. Through Tinman technology, this can now be completed 100% autonomously through AI 24/7. Betsy meets the customer anywhere and anytime they want. [Presentation]

I want to highlight for you what is differentiated about Betsy from other AI bots that you might have seen across financial services. This is not just an FAQ bot or an appointment scheduler, which we have seen other mortgage companies utilize. Those bots typically perform a single function and interact with users only over chat versus voice. The reason for these limitations for other mortgage companies is that they are only connected to a single software system out of the 7 to 8 systems typically used by most mortgage companies. Additionally, most of these legacy software systems in the origination and servicing are built on 1980s architecture, greatly limiting the functionality of AI tools. Betsy is built on Tinman, which is an end-to-end point-of-sale system, CRM system, pricing engine, eligibility engine, loan origination system, insurance engine, appraisal management platform, QC system and closing platform, all in one. Everything that the customer or our loan teams do is captured in this platform, and every fact about the customer or the property is stored in a centralized fax graph. This enables an LLM to very efficiently have full context and going back and forth across any part of the mortgage process with the consumer, like a human would. Most other mortgage companies were they to implement a full-stack AI agent would experience massive latency pinging information back and forth between the AI agent and the multiple systems involved latency that would be so slow that a typical consumer would just do now. Because of Tinman's end-to-end platform, Betsy can handhold customers from initial inquiry through rate lock all the way to fund in a single interface. Another application of AI we have been scaling is using our Tinman AI to assist in performing the functions traditionally done by the underwriter, in particular, qualification of income, assets and credit to prepare an underwriting decision. As you might remember, by automating significant elements of the document collection, data extraction and underwriting calculation, we have been able to grow our 1-day mortgage product to be over 70% of our mortgage volume with an average time from lock to commitment letter of 8 hours. Our revolution in mortgage lending when getting a commitment letter can take up to 45 days. In the most recent quarter, we began leveraging AI review to bring the process down to under a minute in certain cases. This is pretty astounding. We are going from 1 day mortgage to less than 1 minute mortgage using AI. Our goal is to grow AI underwriting review to over 75% of our locks by the end of 2025, dramatically decreasing our fulfillment labor cost per loan and debottlenecking one of the critical areas of the mortgage process. Our third area in which we have made significant progress within mortgage underwriting is the intelligent routing of appraisal requirement and AI underwriting of title insurance. Through advances in this process, we have begun enabling instant title and appraisal for a small percentage of our locks, which we hope to continue increasing over the coming months. We believe the potential for our customer to be fully underwritten for a mortgage across credit income assets title and appraisal within minutes of going into a contract on a home is not very far away. The core message is we are pressing harder on the massive advantage that we believe we have with respect to AI agents within our Tinman platform in light of the changes we are seeing in the regulatory climate. We have seen a substantial increase in friendliness towards AI from a regulatory perspective over the past few months. The gloves are off for us with respect to AI. This past month, we implemented Betsy as the primary customer interaction point in 1 state for refinance loans with the human loan officer being on standby as a guardrail. We believe that Betsy has the potential to reduce sales cost per loan by $2,000 per fund and operations cost by $1,400 per fund, which would represent us getting to a fraction of the industry is spending and we are just getting started. Finishing with our third priority of diversifying our distribution channel through growing our B2B business, we continue to see demand for our technology platform from new partners with strong brands who are looking to offer mortgages to their customers in a cost-effective way or improve the fulfillment efficiency of their existing mortgage business. First off, I want to start off by updating you on our partnership with Ally Bank. Better and Ally have been engaged in the mortgage partnership for over 5 years, and we are proud of what the 2 companies built together to revolutionize white label mortgage technology offering. Around the end of 2024, Ally made the strategic decision to exit the mortgage business altogether. And as a result, we began winding down our Ally volume in the fourth quarter. We expect Ally to be fully exited by the end of Q2 of this year. Alongside winter seasonality, this wind-down contributes to volume being lower in the fourth quarter compared to the third quarter of 2024. Moving on to the growth updates. Last quarter, we announced the launch of NEO Home Loans powered by Better. and I'm excited to report that we are making great early progress towards our goal of diversifying better distribution and leveraging Tinman to power local loan officers by removing friction from their fulfillment process and expanding their capacity to help more customers. NEO Powered by Better will also leverage Better's AI technology and digital lead funnel to supercharge NEO's loan officer teams who have demonstrated track records in customer service excellence and strong reputations within the communities they serve. Betsy, individually branded for each retail loan officer at NEO as well as lead routing of early-stage purchase customers from better D2C channel who can be more effectively served by a loan officer in their neighborhood is expected to dramatically improve efficiency and drive conversion gains across both D2C and our retail distribution channel. Since beginning production in January 2025, we have onboarded approximately 110 NEO loan officers across 53 branches. To date, NEO Powered by Better has served approximately 220 families equating to $95 million in Funded Loan Volume. On NEO Home Loans, we are seeing an average gain of sale margin of approximately 365 basis points compared to our Better dot-com Gain on sale margin of 217 basis points in 2024. With NEO, I am excited about the unique opportunity to unlock key parts of the market that have historically been challenging for online originators without established local footprints to serve. Specifically in the purchase mortgage segment and for certain loan types like FHA, VA, down payment assistant programs and buydown programs. Joining me today is Ryan Grant, Co-Founder and President of Retail Lending at NEO Home Loans who would like to share why he is excited about the opportunity we have ahead of us with NEO Powered by Better.

Thank you, Vishal. Our team here at NEO Home Loans is incredibly excited to now be powered by Better, this partnership is more than just a collaboration. It is a fundamental shift in the mortgage industry. We believe that together, we are creating the most valuable mortgage platform, not just for our clients and our business partners, but for every mortgage professional in America. NEO Home Loans was founded on a simple but powerful idea. Changing the expectations of what a mortgage company should be. For decades, the mortgage industry is focused on selling debt, leaving many professionals questioning the real value they provide. And we set out to do more, to guide clients well before they purchase a home and continuing to proactively support them for decades after helping them build long-term wealth. However, we faced significant challenges from an entrenched industry, outdated technologies made processes inefficient, scalability was costly and limited. We struggled to get our message in front of enough clients. And for local mortgage professionals, the industry lacked financial transparency which created a misalignment of priorities. These were all major barriers, but the partnership of NEO Powered by Better is solving them all. That's why we're so proud of this opportunity as it positions us to truly transform the industry. You see for years as mortgage professionals, we found success despite technology, not because of it. And when we visited Better's headquarters, we saw Tinman and met Betsy, and we were stunned. Better had built technology that matches human level performance across a range of mortgage tasks, something that no one in our industry had seen before. And with this AI-powered infrastructure, NEO can now combine the best of both worlds. The speed, efficiency and automation that clients want, with the advice, strategy and long-term commitment from a local mortgage adviser that they need and deserve. This is an absolute game changer. Now our strategy at NEO Power by Better is built on 3 key beliefs. First, we will drastically reduce loan costs and increase the scalability of our teammates, which is a major problem for most in the mortgage industry. With Tinman and Betsy, our teams can efficiently serve more families with more value and at a much lower cost. This allows us to compete with discount lenders without sacrificing value. Our second key belief is that we can help subsidize the local mortgage professional with lead generation that has become much harder in the past few years. The market has shifted, making it harder for mortgage advisers to find clients that need help. And when we learned that roughly 30,000 people per month are acquiring with Better about purchasing a home, we knew that our team of highly trained advisers could convert more of these curious prospects into actual homeowners. Now we're going to begin scaling lead routing in April with a short-term goal of 10% conversion, which is roughly a 500% increase over the current levels, Better experiences in its D2C channel. We're also excited to be able to connect these homebuyers with the best real estate agents across the country and to be able to help more of their clients as well. And between the increased lead conversion and working with more of the best agents in our local markets, we expect that the cost of acquiring a client can be drastically reduced. Now our third key belief is that by creating the industry's first truly transparent partnership lending model, we can empower local mortgage professionals to have the confidence knowledge and financial understanding to operate at much higher levels. And by doing this, NEO Powered by Better is creating a natural alignment of interests between each team member and the organization as opposed to misaligned priorities that mortgage professionals have had to deal with for decades prior. And lastly, we are excited to be able to share more about NEO Home Loans powered by Better with local mortgage professionals across the country. We expect that when they see and start to understand this combination of technology, efficiency, scalability and growth through lead generation and referral partnerships that the best and brightest will want to partner with us in our efforts to completely change and improve the mortgage industry. In 2024, our NEO team funded approximately $2 billion in mortgage volume, while remaining profitable. Now Powered by Better, we're positioned to scale even faster, drive greater profitability and deliver even more impact. Together, we're redefining mortgage lending, and this is just the beginning. Thank you. And with that, I'll turn it back over to you, Vishal.

Thank you, Ryan. We are so pumped to have the NEO team on our platform and as our partners as we disrupt the mortgage industry together. Looking now towards 2025 and beyond, the medium-term opportunity is very exciting. We remain focused on enhancing our go-to-market with growth being our North Star alongside continued expense management and channel diversification. We will continue to invest in Tinman AI to improve the customer experience and further drive down labor costs, making our platform more efficient and scalable, driving the business to profitability in the medium term. With that, let me now turn it over to Kevin Ryan, our Chief Financial Officer, who will discuss the quarterly performance and our financial strategy. Kevin?

Thank you, Vishal. As discussed in 2024, even through a continued challenging market environment, we made great progress towards our goals of driving increased volume and revenue, balanced with ongoing expense management and improved efficiency. In the fourth quarter of 2024, we generated funded loan volume of $936 million, revenue of $25 million and an adjusted EBITDA loss of $28 million. Total GAAP net loss was approximately $59 million. Our fourth quarter funded loan volume was 81% generated through our D2C channel and 19% generated through our B2B partner channel and with 62% purchase, 80% home equity loans and the remainder by dollar volume was refinanced. In addition, we are experiencing early success with our U.K. bank, the Bank of Birmingham. With scale loan originations over tenfold from December 2023 to December 2024 as we have implemented our technology in the U.K. We expect to more than double U.K. bank originations again in 2025 as we deploy AI with the goal of building the leading AI-driven specialist mortgage bank in the United Kingdom. Turning now to our outlook for full year 2025. We remain focused on managing towards profitability in the midterm, and we expect to drive growth through efficiency from Tinman AI distribution channel diversification and optimized marketing while balancing these growth expenses with further corporate cost reductions. For the first quarter of 2025, we expect funded loan volume to be down approximately 10% to 15% compared to the fourth quarter of 2024, given continued seasonal slowness in the wind down of our Ally businesses, which, as a reminder, made up 29% of our full year 2024 volume and 19% of our Q4 2024 volume, and we expect to be only low double digits percent of Q1 volume for fully winding down at some point in the second quarter. We are particularly excited that the NEO funded loan volume is pacing ahead of plan, and we expect to do over $90 million of NEO originations in March alone after February was the first full month of NEO on our platform. As another data point here to put our trends in the context of the industry, the Fannie Mae, February housing forecast is overall Q1 market volumes declining 24% quarter-over-quarter demonstrating Better's outperformance of the market as a whole in Q1. For the full year 2025, we expect funded loan volume growth in the low to mid-double digits percent growth year-over-year, driven by tailwinds from growth initiatives, including NEO Powered by Better, offset by continued macro headwinds and the loss of the Ally business, a roughly $900 million headwind. We expect this growth to come particularly in the second and third quarter of the year, at which point we expect NEO to be more fully ramped and to benefit from improved seasonal tailwinds. We also expect to further decrease our adjusted EBITDA losses in 2025 as compared to 2024 due to a combination of efficiency gains as well as continued corporate cost reductions. Lastly, we are undergoing efforts to exit our noncore U.K. assets while continuing to focus on growing the bank. We expect the exiting of 3 smaller noncore U.K. businesses to start being a benefit to our adjusted EBITDA losses in the second half of 2025 as a result of their disposition. With that, I'll now turn it back to the operator for Q&A.

[Operator Instructions] Your first question comes from the line of Eric Hagen with BTIG.

The AI playback was actually pretty interesting. How does the underwriting and the AI technology adjust for the high cost to limited availability of property insurance. Like in the tech like adjust for that in any way? And do you even see that maybe creating an opportunity? Because there's folks coming into online and just ways to fulfill that loan more efficiently.

I mean that is a really great question. I mean what you saw there was not like a form filler outer engine. There are over 15 different data forks and API calls that went through, 45 investors filtered down to 5 HELOC investors and running all the permutations across credit DTI LTV cash-out amount and actually insurance quotes closing costs across 3,600 counties in the U.S. We have an assurance engine built in where we delivered instant homeowners insurance to consumers while they're going through a refinance or a HELOC process or a cash out refi process. So we're talking about things that used to take a lot of people to do. So like again, if we think that like [ Betsy ] is going to be able to get the 10-year treasury down, right, back in 2019, we went from $85 million in revenue to $850 million plus in revenue in 2020, over $250 million of EBITDA, but the machine was about 50% automated. Right now, Betsy can do basically all of the functions that those refi salespeople were doing back in 2020. At 0 -- near 0 marginal cost. That means we not have to hire 3,000 people, right? We don't have to hire 5,000 processors and underwriters and we don't have to hire 1,000 insurance agents that we used to have. So I think there's just extraordinary scale that we've now built into the product, and Betsy is accommodating all of that. And we're really, really looking well positioned in a way that we haven't been in many years for anything changing in the macro environment, including what you've outlined, homeowners insurance rates going up.

Really good stuff, interesting. If the trend for profitability keeps moving in the right direction, how do you maybe think that, that will drive the amount of risk you take? And how do you benchmark kind of like the amount of risk you're taking in a certain period? And even how you might price for things on the front end?

That's a really good question. I think what gets lost in the dialogue about us versus many of the other FinTechs, is we are operating a pure marketplace business. We do not hold loans on balance sheet that have not already been committed to be sold to others. We have 45 institutional investors on our platform that are buying our loans, our HELOCs every day. And so fundamentally, we don't make a loan unless we've got buyer lined-up, when you're locking that loan with us, we already know where it's going, and that's how Tinman is fulfilling the set of underwriting criteria for that particular investor to deliver that loan to that particular investor. So I think the path to profitability talking about is not 1 built on taking any more marginal units of risk. The path to profitability is really built around like -- we lost like basically $9 million a month last quarter, right? With what we're doing to shut down the U.K. businesses, that's like 1 million a month. What we're doing to improve the profitability of the bank. We think that gets us another $1 million a month. I think with AI, driving down operations costs, I think we can like scale up and save another $3.5 million a month. We've got a whole bunch of compliance, legal costs from the de-SPAC, the very aggressive CFPB era, all of that sort of stuff. I think we can scale that down $1 million a month. We got a bunch of legacy contracts that we still have from '21, '22, right? Which we just finally got out of the office space that we had in New York that was like 45,000 square feet and downgraded by 80% and moved to a cheaper space. Something that's another $2 million a month. And then you should add some volume growth, add some improvement in margin, add some profit from the NEO channel, and you're getting to breakeven and so we see a path to breakeven again, built on efficiency, built on exiting a bunch of the legacy costs that we have from the '21, '22 days and exiting the legacy businesses that we have and improving margins that you see us continuously doing. And again, without taking any more risk from a credit standpoint.

Yes. I mean, Eric, I'll add to what -- it's Kevin, to what Vishal said, I think 100% of the loans we did in the quarter were pre-committed to investors at the time of origination. If it's not 100%, it's 99%, right? So we don't take really any risk. The only -- the way we think about risk is, should we lean into marketing this month versus next month depending on market conditions, right? But that is a very tactical in the moment decision. And then on the expenses, if you look just Q3 to Q4, we took out $11 million of expenses, core expenses. The expenses look roughly the same because we took a $16 million charge on the disposition of the U.K. assets, that was noncash, onetime. But when you strip that out, we got expenses down about $11 million, $12 million in the quarter or $4 million a month. So we are -- and in all major categories, I think, as Vishal said in the prepared remarks, we were down. Corporate expenses were down a bunch. Marketing was down a bit. So we definitely took a lot of expenses out in Q4 and continuing to do so in Q1.

The next question comes from Jake Kooyman with Oppenheimer.

This is Jake Kooyman on for Rayna Kumar. Can you walk through the saving opportunities from Tinman application of AI as well as how that contributes?

Totally. So I think the savings are -- when we think about your traditional loan officer and loan officer assistance, right? The bulk of their time, particularly in the D2C channel is spent servicing customers that are coming in via the online channel, chasing after those customers in the purchase market, chasing after the realtor who those customers are using and so there's a ton of effort on outbound calls. And then there's a ton of effort chasing inbound calls that you missed because you were on the phone with someone else. Now again, you can staff up. You can have a 10,000-person call center to capture all these calls and you make all these outbound calls like other mortgage companies doing 400 outbound dials a day, it's really inefficient and really grinds down the labor force. We have Betsy doing all inbound calls in the nights and evening. So we don't miss a single call. We used to like miss 40% of calls that would come in because people would not be available to meet their loan officer because they're calling at 9:00 p.m. in the evening after they put their kids to bed and they're looking at what they're doing for the home buying that coming weekend or they're calling us on the weekend when they're about to go into contract on their home and they want to make sure that the rate quote is still good and they want to refine the purchase amount. Now we have these tools online, but Betsy really dramatically reduces the cost, but also most importantly, improve the customer experience because it's always on. And we have -- and so I think that's been a game changer. And I think there's ability to take up $2,000 per funded loan in sales costs once Betsy gets fully implemented in the sales funnel, right? So we're doing almost like 1,000 loans a month, right? And we're trying to scale that up with NEO is more than that. So we're getting there, right? Like that's some serious savings per month that we're able to generate as we implement this, not just for ourselves but for our B2B partners. On the automation side, we are pressing ahead. If you look in the earnings supplement, you will see the percentage of locked loans that are AI underwritten and that's increased about 40%. The loans that are AI underwritten, we're saving $1,400 per loan, right, potentially. And we're -- and again, so you add those 2 things up, we're talking about production cost that's already more than 35% cheaper than the rest of the industry. And now you're talking about for the full AI-driven loans, you're talking about $3,500 per loan in savings on top of that. Now that's all going to go to margin because we already have some of the -- the lowest gain on sale and therefore, the lowest price to the consumer out there. And so all those enhancements will effectively drop to the bottom line. I hope that provides some context.

The next question comes from Bose George of KBW.

This is actually Alex Bond on for Bose. Just to start with us now almost at the end of the first quarter, just wondering if you'd be able to give us an update on how gain on sale margins are trending quarter-to-date compared to 4Q in light of the decline in rates over the course of the quarter? And then also, as you mentioned in the prepared remarks, the Gain on Sale Margin on NEO loans has been stronger to date than the 2024 company-wide margin. And you mentioned that there's potential maybe to improve this further as efficiencies improve. Is this primarily from AI and other tech related? Or would this be from -- primarily from AI and other tech-related improvements? Or are there other components that could be improved efficiency wise as well? Any additional color there would be great.

Okay. So this is Kevin, I'll start, and I'll unpack that. There's a couple, I think, some questions in there, and Vishal probably want to jump in. So on gain on sale in Q1, it is trending higher we put in a release $90 million in NEO loans already in Q1. We really just they just onboarded in February. We crossed the $100 million this morning. So we are over $100 million loans. And they are running much higher 150 basis points higher on average gain on sale than in direct-to-consumer business. Now that is something we knew going in expected, we would have been disappointed if they weren't running a higher gain on sale just given their boots on the ground, business, their expertise, et cetera. So our aggregate gain on sales should trend higher as NEO is a bigger part of our production, right? I mean, practically, we're replacing $1 billion a year of Ally volume with call it, $2 billion in NEO, let's just say, this year, and that will be a much higher gain on sale than what we would have reported on our Ally. And then on the D2C business, I'll start, I'm sure Vishal will want to jump in. Yes, Betsy and the AI allow us to -- we've gradually increased our gain on sale in the direct-to-consumer business, right? We were sub 2%. We're now north of 2%. We're not at the 3.5% that NEO's at, but the business isn't built that way, right? It's an online business. As Vishal said, we have some of the lowest rates out there. But through our improvements and better customer experience through the AI, we've been able to gradually increasing on sale. And the rate drop we've had, we're kind of roughly around 6.75% now on rate, right, has definitely helped to bid as well.

Yes. So I'll tell you what's contributing to the margin increase. Online, a consumers submitting effectively a lead. When they're online, they're shopping around. They're going to our site. They have a tab open with somebody else's site. They might be on 1 of the comparison shopping engines, and typically, consumers would submit a lead, and it would take us more than 5 minutes to get back to them, right, to call them, to try to reach them. By which point, they may have gone somewhere else. So the efficacy of our marketing was lower, but also they're shopping around. We've taken that 5 minutes and brought it down to 800 milliseconds with Betsy across the board. That's an improvement of 400x in speed. And so now we're catching the customer faster than anybody else. We're catching that customer before they have a chance to go somewhere else, shop around able to tell them about our closing guarantee. We're able to tell them about the better price guarantee. We're able to answer their questions. We're able to convert them from a lead to an application. We're able to improve them. We're able to do all these things that before just with a human staffed call center, was kind of nearly impossible. And so then you end up competing much more on rate than you do on speed and surface. And I think that, that's, again, it enabled us to continue to get better margin while still maintaining our value proposition for the consumer.

Your next question comes from Reggie Smith of JPMorgan.

Really encouraging the disclosures you gave around the potential savings from I guess a lot of your cost initiatives, my question, and I'm not sure if you guys have broken it out or even thinking about the business this way, but is there a way to contextualized contribution profit per loan or loan economics that way? I know you guys cited some savings potentials in the press release. But I'm curious how you guys think about and how we should think about like loan economics at the loan level? So like revenue per loan expenses, is there a way to attribute whether it's marketing overhead to the loan origination process? And I have a follow-up.

Yes. And so it's Kevin. I'll make a few comments. Obviously, in the GAAP financials, you don't see that. We run the business on a contribution margin basis and the contribution margin in the mortgage business has been improving meaningfully in the last couple of months. And I think we can go -- we'll take away to break it out for next quarter in a way that you'll be able to kind of track it back to the GAAP financials. It's something we talk about all the time. But I will tell you, through these savings and the improvement in gain on sale, the cost savings via the AI, the contribution margin continues to get better on our production. So -- and it continues to be into Q1. That's something we were maniacally focused on, right? Because while we're cutting corporate costs faster than we're cutting costs in the mortgage business, we also need to lower cost in the mortgage business in order to really drive contribution profit that we can then use to cover what is -- you're always going to have some fixed overhead. So we think about that all the time.

Yes. Reggie, 2024 was a lot of changes. We moved from a salary-based loan officer and processor model to an incentive-based low base, high incentive model. We started recruiting experienced loan officers we had to teach those loan officers Tinman, the ones that didn't understand or couldn't be productive on Tinman. We had to let them go. So we had some charges. So 2024 and then -- Yes. And then we did NEO at the end of the year, and we have some onboarding expenses related to that. And then lastly, like we were hoping for the rate cut to actually -- in September to actually bring rates down and that did it so that made a bunch of our marketing spend negative because we're buying leads and the consumers thinking they're getting that 6.5% rate by the time they get to lock they're getting a 7.25% right? That consumer is not in the money anymore or that consumer is not able to -- it isn't going to proceed going forward is going to wait. So we had a lot of challenges in '24. We made a lot a lot of progress. But what we decided by the end of '24 was like we are going to focus maniacally on any growth is going to come with positive contribution margin, and we're going to continue to expand the positive contribution margin even if that means forecasting a slightly slower growth rate. Now I think we can achieve fast growth and improved contribution margin, and that's really possible not in a human-centric business model, but an AI-centric business model. And I think that's really what we're leaning very, very hard into. So hopefully, that can give you some context for the future. And of course, we'll take it under advice that like we need to get out to make your job easier that to break out contribution margin next quarter.

I didn't know if I had missed that or what. Like I said, I don't have a model for you guys. And so like that was just something I was looking for. So I wasn't sure. If I could set 2 more questions in really quickly. One, I love the demo that you guys showed or presented during the call. I was curious how it's resonating with consumers? And my inclination is -- and I can totally be totally opposite. It probably -- for younger people, it's probably a more natural way of doing things. I was curious, any feedback you've gotten or insights you've gotten in terms of are younger folks using the automated system better than older people? And how often people opt out and say representative or something like that? And then my last question, you talked about, I guess, approving a loan in 1 day. I was curious how quickly you guys can fund the loan. That's something that I've come to appreciate in the last month. I'm trying to sell my condo in Brooklyn, so like people that have -- that are able to close quickly makes a difference. I was curious if you had any advantage there as well?

Yes. No, that's a great question. So we're seeing adoption of Betsy, in general, be quite high. About 18% of consumers ask to be transferred to a human loan officer, as part of the process, right? So they encounter it, they realize that it's an AI and they want to move on to a human. So yes, we're going to work to get that down. And we've got to work to get the voices more humanistic. We've got to do a lot of work on continuing to add the functionality. So I would tell you, in early days. Like we launched the first version of Betsy in not a few -- only a few months ago. So you can sort of see what we're increasing functionality, increasing realism, and it's going to improve. The uptake has been greatest between the ages of 20 to 35 and then obviously, surprisingly 55 and up, right? Because they're okay with something that goes a little slower in terms of talking and it's talking clearly. And so we've seen some good stats around that. Again, early days. We'll see how that all shapes up. But definitely, young people love the fact you can talk to at any time, you can text with it, you have a loan officer, you can go to any time. So we're just really leaning into that. And then the last question with respect to closing times, I think in New York, we're able to close a loan on average. Let me just actually get the stats but much faster than the competition. And give me a second. I'm just going to pull it up for you. On New York, we're doing the industry average for closings is 46 days. And we're doing 32 days. Now of course, there's a lot of latency there with like people have to figure out how to move and all that sort of stuff. But we're about 40% better than the competition in New York State specifically.

No, that's good. It's something I didn't appreciate until I went through the process for myself. So glad to hear, that's a really important selling point for buyers. And I'll tell you, like, firstly, I hate AI, but it's something I've got to get used to in terms of the automation. I'm one of those 18 [ percenters ] that's always representative of us out here and automate it system. But yes, it's -- it will be interesting to watch that evolve over time. Congratulations on the quarter and good luck, guys.

Hey Reggie, if you find a buyer in Brooklyn then tell him to go to Better.com, we'll preapprove them in a couple of minutes.

The next question comes from Michael Kaye with Wells Fargo.

If I look at the Q4 adjusted net income and adjusted EBITDA, and there was no improvement in year-over-year profitability despite volumes being up 76% year-over-year. Can you just walk through why the higher year-over-year volumes and cost initiatives over the last year is in translating into better profitability? Maybe just walk us through some of the dynamics and if I'm missing anything.

You're doing year-over-year is what you're doing?

Yes. $38 million loss, adjusted net loss in Q4...

Yes. As Vishal said, we -- marketing expense, we took marketing expense up and that was the biggest difference. And we actually hire more people as well into -- as Vishal mentioned before, we hired more people into what we expected to be a declining rate environment in the second half of the second half of 2024, which bluntly didn't really pan out. And we've pull back a bit on that. And so that -- some of that noise you're seeing in there. Q4 of '23 was a low point of volume. It was also a low point on staffing within the mortgage business -- the mortgage factory. So all the other corporate costs and everything have come down dramatically since Q4 '23, but marketing expense was higher Q4 '24 as was like sales and ops labor. As we're getting Betsy going, that will continue to come down. On a unit basis, which I think was part of Reggie's question, which we're going to try to break out.

Yes. I mean we were overstaffed in Q4. We've -- after implementing Betsy, we've been able to reduce staffing by about 250 people in the mortgage factory.

Okay. Shifting gears. And what's your level of optimism on spring home purchase season. Rates are around 6.75% more home inventory now available, probably some pent-up demand from buyers, though there's affordability headwinds. So just talk about how you're thinking about spring home purchase season?

We're seeing the volume of pre-approvals per marketing spend continued to improve dramatically. And I think that, that's a good leading indicator, right, of how many people are running out and just going shopping. We'll see how many of those people actually are able to find a house. But so far, it looks like the level of preapproval per dollar of marketing spend continues to improve pretty dramatically. So we're optimistic for what happens. And look, like, again, the noise from Washington is about deregulation and about getting the tenure down. And so you put your odds on whether they can make that happen. If you believe that, that can happen, I think we might be in for a positive surprise this spring and summer home buying season.

The next question comes from Jamie Friedman with Susquehanna.

Interesting presentation and demonstration really quite helpful. Most of my questions. I was just wondering about the macro. In terms of how you're characterizing the supply and demand dynamic in the end market, where do you think we are in that continuum and what are you anticipating, if anything, for the year ahead? I think what we always say at Better now is that we have unfortunately, not been able to predict the macro environment for the past 3 years. We are optimist as hard as any technologist will tell you, you have to be an optimist otherwise, how are you going to believe. We do think that the supply-demand imbalance in housing is going to get rectified in the next year or 2. I think there's obviously an impact of tariffs. But that means that the homes that are out there available for sale today are a relative bargain if the tariffs do actually continue and the raw material cost of building a home goes up substantially. So I think old houses are going to sell more. We're seeing demand for the HELOC product really explode because people need to fix up to houses, like the boomer houses need to be modernized to be able to sell to the millennial buyers. And so we're seeing a ton of demand for home renovation on the HELOC product before people look to sell their house or if they stay in the same place. We grew our HELOC business 400% last year, the fastest-growing HELOC lender in the market. And we think we can grow it again pretty dramatically this year. And we've gone from basically nothing to being one of the leading HELOC lenders in the country. And so I think we're trying to build a balanced portfolio of loan types so that we can thrive in any macro environment out there.

Yes. I think we're -- as Vishal said, it's been really hard to predict the macro and if you listen to our earnings calls this season, were in the tail end, the word uncertainty comes up 20x the call. That's just kind of the macro we live in right now. Every company does in our industry, in particular, that's important, we get it. Well, we definitely think we are way ahead of the trend and the inevitability around technology disrupting the legacy mortgage process in the U.S. is probably maybe taking a little bit longer than we thought, but the trend continues, and we think we're definitely right on that trend, and that will play out over time. Regardless of where rates and the starts data was pretty good in February, but then people say consumer confidence is down. So what does that mean for spring season. We get all that and try to factor that in and does impact our market decisions on a day-to-day basis, but it doesn't really impact our tech road map at all. We know what we have to build.

Yes. I'll add that we're sitting on over 2 million pre-approvals over the past couple of years that we've issued where the people have not found a house. So we don't know when the dam breaks, but when the dam breaks, we're going to be well positioned. The number of people that come to Better.com and get preapproved per month is percentage points of market share in terms of the number of people that are shopping for a home. And the numbers that actually convert like is basis points of market share. So -- and a lot of that has been availability homes. And so we are really hoping that if the tide turns on rates or home affordability or availability, we are in a position to meet that demand in the same way that we met the demand in refi in 2020, but without the staffing costs that we incurred in 2020. So I think that's why you continue to see us lean so hard into the AI.

The next question comes from [ Will Brenneman ] with West Coast research -- sorry, North Coast Research.

So I wanted to ask how long do you think it will take to get NEO back to its former run rate volume as Tinman gets ramped up and you mentioned Betsy driving cost efficiencies going forward. When you see the majority of those further cost efficiencies fully realized? And then I have just one more quick question.

Sure. I think we're looking for NEO to get back to their original volume in the next couple of months...

Yes, Q3, it'd be back to where they were and then Q4, hopefully be better than where they were.

And I'll tell you, like we announced NEO, we were at some industry conferences, demoing Betsy and the number of loan officers with large retail books that reach out to me on LinkedIn to say, "Hey, can you join the number of people that reach out to Ryan and Chris and Danny were the principles at NEO" is pretty long. So we're just making sure that we can fully broaden out the product sets that are in Tinman. We're making sure that we can fully serve all of these loan officers. We're helping them go from driving like a Ford Taurus in the existing infrastructure and mortgage lending that they're on to driving a Ferrari, and we just need to make sure they can do it and then they're off to the races. So NEO is going to be back to its original loan volume in a couple of months, and then we're going to grow that dramatically from there. And then the other part about Betsy, we're going to keep you updated on the percentage of consumers and the percentage of consumers that are interacting with Betsy and therefore, dramatically reducing costs from sales and then we'll keep you updated on the percentage of loans that are being underwritten by Tinman and you can compute just the cost savings from that. And then the remaining loans still are subject to the old cost structure. But we'll keep you guys updated on that. But the cost savings are pretty significant, and they're starting to show. They're going to show this quarter, they're going to show next quarter, they're going to show in the next third quarter. As I said, we think by the end of 2025, 75% of loans are going to be underwritten by Tinman AI. And with respect to Betsy, we've got 1 state, that's all Betsy. So you take that, and then we got to get to 50 states that are all Betsy.

Okay. Great. And then my last question, what do you see is the expansion opportunities within the broader distribution retail channel like NEO?

I think it's massive. I think a number of people that we have reaching out to us to scale. Look, like on direct-to-consumer, we're fighting against some pretty sophisticated folks. We're fighting against Rocket. We're fighting against LoanDepot, we're fighting against a number of people that have invested in technology. In the retail channel, we're fighting against effectively loan officer staffing platforms that have benefited or mortgage broker platforms that have benefited from the lack of any technological sophistication within that universe. And I think there's a pretty heavy tax that these platforms charge to the incumbent loan officer and I think we can free them from that. I would say the closest example to that is what has happened in the RIA space, right, versus hanging your hat at an old wire house and getting a percentage -- a small percentage of revenue, you could go to the RIA platforms that are tech savvy and private labeled and give you basically everything and keep a larger percentage of your profits, I think that's the disruption that's going to happen in retail, and I think we're going to lead that disruption.

The next question comes from Brendan McCarthy with Sidoti & Company.

I just wanted to start on the corporate cost reduction side. I think you mentioned -- Yes, you mentioned corporate cost reductions benefited '24. Just curious as to where you see the biggest opportunity for further reductions in 2025.

Sure. So there's a couple of areas. We're going to continue on comp and benefits. Now on the GAAP line item, right, everything is blended together, whether it's corporate or sales, U.K., everything is going to blend it together. So we can -- we'll do -- we'll break it out going forward. You're going to continue to see benefits there. We're sitting in an office building right now that's 20% the size of the one we were sitting in the last earnings call. We're saving $10 million in lease expense over the next couple of years just by moving offices. So you're going to start to -- we're dramatically renegotiating vendor contracts. Some we got done in the second half of '24. So you'll see a full year benefit in '25. Some will get then over the course of '25. So you'll see a full year benefit in '26. And so it's really in all areas. If you look at just even G&A, right, year-over-year was down 70%. And G&A quarter-over-quarter was down $2 million, Q3 to Q4. So we're -- in professional fees would be the other. Those are kind of the 4 big areas. Obviously, comp and ben is the biggest area G&A, some of that is in technology expense, some of that's in G&A the vendors and then obviously, your -- most of the lease work has already been done, but you're going to start to see the run rate benefits this year.

Great. That's helpful. That's helpful. And then what opportunities do you see for additional B2B partnerships in the market just given the strength of the growing technology stack for your company?

Yes. So I'll give you an -- 3 examples. We launched Betsy in October. In the past couple of months, we've gotten a call from the CEO of a top 5 servicer saying, "I want to build a recapture business, and I want it to be all AI. Can you private label Betsy for me and therefore, private label Tinman for me and help me do that", right? So we're term-sheet discussions with them. We've got a top 3 financial services lead gen company, right, where, again, the CEO called and said, "I've got a Board meeting in 4 weeks, and I need to show them AI needs to be implemented, right? And so what can we do? " So we said, "Sure, happy to do it." we're going to be out there with their solution, and it's going to be live and it's going to be proprietary to us. We've got a large community bank that wants to, again, do the same thing and have it built around non-QM loans and bank statement loans and nonconforming loans, which, again, are very hard for your traditional mortgage software to do and we're in late-stage discussions with them. So we're seeing the B2B side of it explode in a way that we haven't seen since sort of 2018, 2019, when people were coming to us to like help them build refi engines to address the refi demand. So -- but like we're not going just with the big guys, which is kind of was our strategy after Ally, Amex and others that were on the platform. We've now taken the technology that we built for Ally and Amex and allowed us to get up and running with a B2B partner in 3 weeks. And that's a lot faster than what even a sales contract life cycle is for signing up with like the traditional players in the industry like Ellie Mae or Black Knight or others. So we're aggressively pursuing that. You're going to see us hopefully announce some big things in the coming months ahead.

Got it. And last question for me. What do you expect the impact of losing the Ally business? I guess, how do you kind of gauge that impact? And what are you doing to ultimately offset that loss for the business as a whole?

Yes. So if I just look at -- well, 2 key metrics. I'll just start with 2 and then let me know if you want to expand. On volume, you're just short of $1 billion that was in last year's numbers that you're not going to see in this year's numbers. There will be some volume in Q1, but it really tails off after this quarter. NEO more than replaces that. And we guided up to low to mid-double digits growth in volume this year. So we're going to grow volume despite losing at $1 billion. We're confident in that, and NEO is a big part of it, obviously. And on EBITDA, it's really a neutral event. Net-net, the way we had structured the fee relationship with Ally worked extremely well in a very good low rate environment. But you have a fixed amount of people you need to put against a large B2B partnership like that. And as their volume came down along with the industries, they pulled back on marketing spend, et cetera. We totally understand why they did it, you were running basically an EBITDA-neutral business. And so there's no negative impact to EBITDA because we've obviously addressed the expenses associated with Ally as the revenues come off. Is that helpful?

Yes, absolutely. That's helpful. Congrats on the progress.

This concludes the question-and-answer session. I'll turn the call to Vishal Garg, CEO, for closing remarks.

Thank you all for all your great questions and for continuing to support us as we build America's leading AI mortgage platform. And in doing so, help consumers get a mortgage, get a better rate have a better process, which lets them have a better house in a better school district with a better commute and a better backyard. And we're -- we started on this journey 8 years ago, the past 3 years have been really difficult for us, but we're playing offense and playing offense hard again. And we're looking forward to driving the business and being able to share more positive news with you in the quarters ahead. Thank you so much, and thank you for believing in us.

This concludes today's conference call. Thank you for joining. You may now disconnect.